A few years ago, I owned shares of Netherlands-based Philips Electronics (NYSE: PHG) for a little more than a year, primarily because the stock was cheap. Fast-forward to today's fourth-quarter earnings report, and I find that the shares aren't all too differently priced, but the business looks a bit healthier and has a well-communicated plan.
Philips, which is perhaps best known for its line of consumer electronics and lighting products, also has businesses focused on appliances, medical systems, semiconductors, and an 11.2 billion euro portfolio (link opens a PDF file) of equity investments that includes JDS Uniphase (Nasdaq: JDSU), LG.Philips LCD (NYSE: LPL), and Taiwan Semiconductor (NYSE: TSM).
For the fourth quarter and fiscal 2005, Philips turned in sales gains of 6.4% and 3.8%, respectively. Analyzing the quarterly results of individual business segments, the medical systems and semiconductor units both turned in double-digit sales gains in the fourth quarter, but consumer electronics, appliances, and lighting all turned in only 4% to 6% sales gains, which pulled the overall sales gain down to the 6% area. However, the strong performance of medical-systems business carries more weight in my evaluation because it's the company's second-largest business and a consistently solid performer. The consistency of the medical business is fairly impressive, considering that it competes with similar businesses within General Electric (NYSE: GE) and Siemens (NYSE: SI).
On the earnings front, Philips reported a 28% decline in diluted earnings per share for the fourth quarter and a 3.6% gain for the year. However, both numbers are affected by a number of one-time charges. In this case, it makes sense to look at the company's performance on an income-from-continuing-operations basis. On this measure, the company's performance looks a bit better, with quarterly earnings down 22% and annual earnings up 4.8%.
This isn't blazing growth, but at a price-to-earnings multiple of 10.6, the stock intrigues me, considering that the company is taking steps toward removing the cyclical nature of its business and divesting its non-core assets. Part of this effort involves moving the semiconductor business into a separate legal entity. This could eventually lead to a sale, spinoff, or joint venture for the unit. In the meantime, shareholders get a 1.5% yield that is set to increase to 1.7% when the 0.04 euro-per-share increase is approved at the annual shareholders' meeting on March 30. When one takes into account the entire picture -- low valuation, divesting non-core cyclical assets, and a decent dividend yield -- the company's stock looks like a fairly attractive package.
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Nathan
Parmelee
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