Philips: Inventing the Lightbulb, Take 2

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Philips Electronics (NYSE: PHG) says it has replaced the standard (and now ancient) 60-watt incandescent lightbulb.

That may be wishful thinking, but the company's LED bulb is the first entry in the Department of Energy's "L Prize" competition, designed to encourage new products to replace the old heated-filament model. First prize is $10 million, and more importantly for the winning company, the accolades would help secure hefty government contracts. For investors, the winning company would probably also score big in the market.

With that competition as a backdrop, Philips reported a surprising third-quarter profit earlier this week. The company posted a higher-than-expected net income of $256 million, in large part because of cost-cutting and efficiency measures across the business. Earnings before interest, taxes, and amortization as a percentage of sales grew 5.2 percentage points from the same quarter a year ago. By reducing working capital, Philips has still managed to increase its cash flow despite its continuing revenue declines.

Philips classifies its business into three main sectors -- Health Care, Consumer Lifestyle, and Lighting -- and in mature markets, Philips has seen revenue drop in all three profit-generating areas. Not a big surprise, given the economic climate. But the big news is that health-care sales show double-digit growth in emerging markets. Those gains have added fuel to speculation that the demand engine pulling us out of the recession lies primarily in countries such as China and India.

For that reason, you should keep an eye on consumer-electronics competitors such as Hitachi (NYSE: HIT) and Panasonic (NYSE: PC), both of which have significant operations in China and other markets with lucrative growth prospects. On the health-care front, Siemens AG (NYSE: SI) might do well to follow Philips' lead in focusing on the emerging markets.

With Philips' innovative technology in its lighting sector, growth in the emerging markets that it focuses on, and effective management in the face of a tough consumer market, I think this company is well-poised to come out of the recession as a strong industry player.