by Salman Ahmed

You may recall a feature in our Quarterly Reports known as the 'Stock Snapshot' where we featured a company in one of our funds. We've moved the feature from the Quarterly Report to our blog. Below is a snapshot of Philips, which is held in our Equity Fund.

Overview

Most of us have bought a Philips light bulb at some point. Today, however, Philips is more of a healthcare company than a consumer electronics manufacturer. The company is headquartered in the Netherlands and its annual revenues exceed $25 billion (CAD).

Philips offers health technology products and services. Its offering includes everyday health items like electric toothbrushes to complex diagnostic devices like magnetic resonance imaging machines (MRI) and computerized axial tomography scanners (CAT). It also provides informatics and consulting services to health care professionals.

One third of Philips’s sales come from the U.S. and more than 20% come from western Europe. Emerging economies account for another third of sales with the balance coming from other mature economies.

Investment Case

Philips has made a successful transition from a wide-ranging conglomerate to a company focused in the growing healthcare segment. An aging baby boomer population and growing middle class in emerging economies is seen as supportive to the long-term grown prospects of the industry.

Diagnostic and treatment devices have the added benefit of allowing Philips to build long-term relationships with clients. For example, MRI machines are complicated devices that require significant outlays by healthcare providers. The machines can last more than 10 years and require ongoing training and maintenance, which Philips provides. Once trained on a Philips product, customers are less likely to switch to a competitor.

The growth profile is supported by Philips’s research and development initiatives. 60% of its offering in 2018 came from products introduced within the last two years, reflecting the innovation drive at the company.

Management has sold most non-healthcare assets. It spun off the lighting business into a separate company in 2016 and continues to own a 16.8% stake. It has also made strides in running the company more efficiently. Customer service centres have become centralized, and manufacturing is less spread out allowing for savings on procuring materials.

Risks

Procter & Gamble, Siemens, GE, Toshiba and Hitachi are all involved in health technology. These peers have not made healthcare their focus but could disrupt Philips's leading position if they decide to.

Government budgets also present a risk. In mature markets, healthcare spending is often driven by politicians. Slowing economies and political shifts can impact spending patterns.

Interesting Fact: PSV Eindhoven, one of the Dutch “big three” soccer clubs was founded in 1913 as a team for Philips employees. PSV stands for Philips Sport Vereniging (translated Philips Sports Union). Brazilian legends Romario and Ronaldo are among the many famous players to have played for PSV. Today PSV is a separate company but retains strong ties to Philips.