Philips Announces Q4 Profit Warning; Trimming FVE to EUR 39; Increased Provision for Product Recall

Narrow-moat Philips announced a profit warning for the fourth quarter of 2021 due to supply chain shortages of semiconductors, logistic issues, and postponement (though not cancelation) of equipment installations in the healthcare business. Management stated the impact of the omicron variant has been higher than expected, as it has strained production and freight globally. Philips expects fourth-quarter sales to be EUR 350 million below initial expectations, which implies a 10% organic decline. We believe the market has overreacted with its 15% decline, burning EUR 5.2 billion in market capitalization, which implies these issues will be structural rather than temporary. Management also announced an incremental provision of EUR 315 million due to an increased scope of the actions taken on the sleep apnea product recall. We are reducing our fair value estimate to EUR 39 from EUR 42 to account for lower sales in 2021 and a slower recovery in 2022. We have also accounted for the additional provision and slightly reduced our midterm margin assumptions, as the next couple of years will be challenging due to COVID-19, supply chain issues, and the sleep apnea product recall still ongoing. Our five-year forecasts are more conservative than consensus and management’s guidance, implying a yearly organic growth in the low part of the 5% to 6% guided range. We also see management’s 2025 target of 60 to 80 basis points of yearly margin improvement as challenging given current conditions, with our model only implying a 50-basis-point yearly improvement from 2020 levels.