Koninklijke Philips N.V. PHG reported optimistic first-quarter 2017 results, driven by higher income from operations and lower financial charges, and also reiterated its full-year 2017 guidance. The company posted first-quarter 2017 earnings of €0.25 (27 cents) per share, as against earnings of just €0.03 recorded in the year-ago quarter.

Investors cheered the strong results, with shares of the company rising 1.3% in pre-market trading following the release.

Koninklijke Philips N.V. Price, Consensus and EPS Surprise

Koninklijke Philips N.V. Price, Consensus and EPS Surprise | Koninklijke Philips N.V. Quote

The Dutch electronics giant reported first-quarter net income of €259 million ($275.9 million), a seven-fold leap from the prior-year quarter’s figure of €37 million. The year-earlier figure had been hurt by taxes linked to the company’s efforts to divest the lighting business.

Improved operational performance and an increase in the top line drove the year-over-year improvement in net income.

Inside the Headlines

Total revenue in the quarter came in at €5,724 million ($6,098.3 million), up 3.8% from the year-ago tally. Top-line improvement came on the back of impressive HealthTech portfolio sales.

Philips’ adjusted earnings before interest, taxes and amortization (EBITA) – the company’s preferred measure of operational performance – jumped a whopping 50.7% year over year to €437 million ($465.6 million), benefiting from cost-productivity programs and higher volumes.

On the other hand, net cash flow generated from operating activities came in at €343 million ($365.4 million) compared with net cash flow of €10 million in the prior-year quarter. This improvement is attributable to robust growth in income from operations.

Segmental Revenues

In the reported quarter, Personal Health sales rose 6.7% year over year to €1,719 million ($1,831.4 million). This segment recorded a 5% hike in comparable sales. High-single-digit growth in Sleep & Respiratory Care, and Health & Wellness, and mid-single-digit growth in Domestic Appliances drove this segment’s top line.

Diagnosis & Treatment revenues increased 5.1% in the quarter to €1,491 million ($1,588.5 million). Comparable sales grew 2% for the quarter. Low-single-digit growth in Ultrasound, Image-Guided Therapy and Diagnostic Imaging proved conducive to growth.

Connected Care & Health Informatics revenues were up 5.5% in the quarter to €732 million ($779.9 million). On a comparable basis, sales inched up 1%. Sales improvement came mainly on the back of low-single-digit growth in Patient Care & Monitoring Solutions. However, sales decline in Healthcare Informatics, Solutions & Services proved to be a drag for the segment.

Revenues in the HealthTech & Other segment fell 10.7% year over year to €92 million ($98 million). Lower royalty income due to foreseen expiration of licenses dragged the sales of this segment.

Lighting revenues stayed relatively flat year over year to €1,689 million ($1,799.5 million) as a decline in Lamps more than offset double-digit growth in LED and Home sales. During the reported quarter, total LED lighting sales grew 19% year on year, and currently represent 61% of total Lighting sales.

Liquidity & Share Repurchase

Exiting the quarter on Mar 31, 2017, Philips’ cash and cash equivalents rose to €2,731 million ($2,909.6 million) from €1,385 million a year back. The company’s long-term debt fell to €3,969 million ($4,228.6 million) compared with €3,984 million a year ago.

During fourth-quarter 2016, the company completed its three-year EUR 1.5 billion share buyback program.

Diligent Cost-Savings Programs

Philips has been strongly benefiting from three of its comprehensive performance improvement and change-initiative programs – namely Accelerate, End2End productivity, and Design for Excellence – implemented earlier. These programs have been designed to maximize the value potential of the company, and accelerate growth by leveraging on innovation and operational execution.

Thanks to these initiatives, in 2016, the company achieved €269 million of gross savings in overhead costs, €418 million of gross savings in procurement and €204 million of productivity savings from the End2End program. In first-quarter 2017, cost savings on overhead and procurement led to a remarkable increase in margins.

The company now anticipates to further improve its performance and targets to deliver 4–6% comparable sales growth and adjusted EBITA margin expansion of around 100 basis points per year.

Acquisition

Late in the reported quarter, Philips signed an agreement to acquire Australian Pharmacy Sleep Services, a pioneer in pharmacy sleep testing. This strategic buyout will complement Philips’ sleep and respiratory care portfolio, and help it to fully access the Australian pharmacy channels, thus allowing it to accelerate the market traction of home sleep testing offerings.

Update on Lighting Deal

Philips was finally successful in offloading a major stake in its lighting business – Lumileds – as it inked an agreement to sell an 80.1% stake in Lumileds to NY-based private-equity firm, Apollo Global Management LLC in early February.

Per the terms of the deal, Philips will get cash proceeds of about $1.5 billion for the stake, roughly 46% less than what was expected in the Chinese deal. This fresh deal, which values the whole unit at $2 billion, is slated to close in second-quarter 2017 and is subject to customary closing conditions.

As a result of the sale, Philips’ shareholding in Philips Lighting decreased to 55.2%, down from 71.2% prior to the deal. The company expects to gradually sell down its remaining stake in Philips Lighting in the coming two years or so.

Outlook

Philips continues to project full-year sales growth of 4–6% and expects to gain momentum in the second half of the year.

While the company expects an uncertain climate in the U.S., Philips is enjoying robust orders in China and India, as well as Europe.

Our Take

Philips’ first-quarter results were largely impressive, with growth in both top- and bottom-line performance. The company’s cost-saving programs have been producing tangible results, thus supplementing its strength. It further believes that increased spending on healthcare and fitness will act as a long-term growth driver, even in the face of continued volatility in the markets in which the company operates.

Philips is presently focusing on key opportunities in population health management, while improving its enterprise-wide solutions for health systems and collaborating with health care organizations, to fortify the company’s foothold in the healthcare industry. Moreover, offloading of the healthcare business is a major positive and will likely help this company allocate its resources in core business areas to stoke growth, moving ahead.

Zacks Rank & Stocks to Consider

Philips presently holds a Zacks Rank #4 (Sell). Some better-ranked stocks in the same space include Lam Research Corporation LRCX, Applied Materials, Inc. AMAT and KLA-Tencor Corporation KLAC. While Lam Research sports a Zacks Rank #1 (Strong Buy), Applied Materials and KLA-Tencor carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lam Research has an impressive earnings surprise history for the trailing four quarters, beating estimates all through, with an average positive surprise of 6.1%.

With four back-to-back earnings beats, Applied Materials has an average positive surprise of 3.9%.

KLA-Tencor has a striking earnings surprise history as well. The company strongly surpassed estimates in each of the trailing four quarters, with an average positive surprise of 14%.

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