Reducing Our Philips FVE to EUR 25; We Believe Management Has a Real Credibility Issue

Profit warnings seem to be the norm rather than the exception in Philips’ fiscal 2022. In a short press release and a call, management downgraded its 2022 guidance as a result of supply chain issues that are affecting product deliveries and installations. It is the fourth profit warning in 10 months. We expect sales to decline by midsingle digits organically year over year, compared with management’s previous guidance of 1%-3% organic growth. Management also downgraded its previous 2022 adjusted EBITA margin guidance of 10%, which would indicate a margin in the midsingle digits. Philips took a EUR 1.3 billion goodwill-impairment charge based on a consent decree proposed by the Food and Drug Administration for the settlement of the sleep apnea product recall and changes in financial assumptions. Our model includes a more than EUR 1 billion cash charge for potential legal settlements derived from this issue. We are trimming our medium- and long-term sales growth and margin assumptions, which leads us to reduce our fair value estimate to EUR 25 per share from EUR 33, as Philips' 2025 original sales and margin ambitions seem unreachable to us at this point. Management indicated that weakness will spill over to 2023, given the macroeconomic environment, but did not quantify any impact.