Cheap and Bright: PHG

Koninklijke Philips Electronics NV

Profile: Large cap globally positioned Euro-based electronics company.
4 divisions: Medical Systems, Domestic Appliances and Personal Care, Consumer Electronics, and Lighting. Medical Systems segment offers X-ray, magnetic resonance, and computed tomography products; nuclear medicine; patient monitoring and ultrasound systems; defibrillators and other cardiac care technologies; picture archiving and communications systems; medical transcription services; and customer services. Domestic Appliances and Personal Care segment provides shaving and beauty, domestic appliances, health and wellness, and oral healthcare products. Consumer Electronics segment offers flat TV; home theater in a box systems; DVD, DVD+RW, and hard-disc recording systems; voice over Internet protocol (VoIP) cordless digital phones; HD and Internet protocol TV set-top boxes; remote controls; digital photo displays; peripherals and accessories, such as headphones, cables, and recordable media, as well as amBX peripherals—accessories; and VoIP phone with Skype and MSN. Lighting segment provides incandescent and halogen lamps, compact and normal fluorescent lamps, gas-discharge and special lamps, automotive lighting products, luminaires, electromagnetic and electronic ballasts, and solid-state components, modules, and systems. The company sells its products to customers primarily in Europe and Africa, North America, Latin America, and the Asia Pacific. Koninklijke Philips was founded in 1891 as Philips & Co. and changed its name to N.V. Philips' Gloeilampenfabrieken in 1912. Further, it changed its name to Philips Electronics N.V. in 1994 and to Koninklijke Philips Electronics N.V. in 1998. The company is based in Amsterdam, the Netherlands.

Financials:

• P/E (trailing 12 mo) 8, PEG 0.49 P/B 1.29 EV/Revenue 0.91. (unbelievable numbers v.s competitors; however, distorted by one time profit from divestiture of Taiwan Semiconductor shares-- i.e. not from organic growth)
• QR 1.00 CR 1.5 (manageable debt but definitely not debt free)
• Gross margins of 37% (same as comps) but post-tax 5 yr avg margins over double competitors at 4.2 (8% last quarter) and projected by CFO to increase to 10% by 2010
• ROI over 5.5x comps (about 10%)
• Dividend 1.9% and promise to increase this by 17% in 2008. Payout ratio only 9% (sustainable).
• Exploding Growth in emerging markets-->Q4 increased profit by 20% v.s. Q4 '06 from these countries
• Share price is approx 25% down from 52 week highs

Advantages:

• global reach and scale
• recent acquisition of two excellent US companies: Respironics (which I know well) and Genlyte, the largest light fixture manufacturer in North America-- both excellent fits for PHG
• LED expertise will have company well positioned to supply large quantities with acceptable quality to a cascade of countries expected to legislate LED use (prohibit incandescent light bulbs) by 2010ish
• management focusing on controlling costs and integration rather than rushing into poorly planned M&As or taking on more debt

After beating the Street's expectations in the last quarter and the share price still falling approx. 5% after that, I think that the downside potential is maximum $5 ($30 USD). Upside over 5 years is 15% growth/annum --> $70/share.

The stock is very cheap v.s. competitors even discounting the one time large divesture mentioned above distorting the results somewhat for 2006 (that's why you'll see on some websites that the P/E is only 4) and I can't see why it should be. I'm not convinced that Philip's
management is necessarily exemplary like I would consider American Express, USB, HOG, CX or BBSI to be; however, unlike in the past, they are executing their strategy and doing so in tough times.

The green energy catalyst could bode well for this company. I think that the business risk and downside potential is low, even with the current economic market in mind. The health care component will also hedge against recession associated downturns.

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