PHG: Phillips is too cheap to ignore

As I mentioned in my summary last month, I'm not a big fan of huge conglomerates. Too complicated, too hard to understand and assign value to the business.

Royal Phillips Electronics NV (ADR) ticker PHG is such a beast but it attracted me for a number of reasons:

• it was simplifying and focusing its portfolio
• it was becoming a major player in the "green energy" high margin LED lighting consumer sphere and medical imaging sector (see the cardiac CT above-- cool, eh?)
  
• it had an excellent balance sheet D:E 0.16 Current ratio > 1.5 interest coverage > 17x and they have $8/share of cash in the bank
  
• a decent dividend of 3.3% yield and only 8% payout ratio (divi is sustainable & lots of room for increasing it)
• a global footprint
  

Since then earnings have been a bit sluggish; however, it is respectably profitable with a ROE of 15% and decent cash flows of 1.7 B dollars/annum. Double digit net margins to date and management expects these to improve as the product mix changes over to the higher margin stuff they sell in their medical device and lighting portfolios.

Since I started buying it at $40 and $35 dollars/share the share price has slowly sunk down to $26/share.

Look at these eye popping valuations:

• P/E ratio of 3 (!)
• P/B of 0.8
• P/Cash Flow of 4.8
• PEG <1

It's being priced as if it were an investment bank sinking in massive debt and begging for a bail out! That's craziness. After it's acquisition of Genlyte, it has the vast majority of the market share for lighting in North America. With a great balance sheet, it deserves better and it will be revalued closer to $40/share down the line IMHO.

PHG is not a great company. It's management's execution is mediocre to above average at this point. It's just massively undervalued right now considering it has the resources to withstand a prolonged recession and perhaps even a depression if that's in the offing for us.

I'd buy at <$30 (it's $26 today!) and hold for up to 3 years. Unless I'm impressed that PHG becomes a great company, I intend to sell at $55 or greater and not hold for the very long term.

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