Koninklijke Philips Electronics is on the right track. Solid results, coupled with another strategic retreat from consumer electronics, represent the latest evidence of a successful overhaul at the Dutch giant. But after a sustained rally, the stock looks fully priced – despite the promise of a brighter future in lighting and health care.
As confidence has grown in chief executive Frans van Houten's recovery strategy, investing in Philips has become unusually rewarding. In the 12 months to Jan. 28, shareholders received a 48-per-cent total return, or triple that of the wider Amsterdam market. That's especially striking because it follows an extended period in the wilderness. Between the turn of the millennium and January of 2012, the return was negative-41 per cent. Over all, Dutch blue chips lost a slightly-less-painful 29 per cent.
Central to the turnaround has been lighting, which now makes up nearly one-third of sales. Excluding exceptional charges, EBITA margins here hit 8.6 per cent in the fourth-quarter – an immense improvement on the 3.7 per cent of a year earlier. There is room for further optimism. Lighting is undergoing a major shift, as short-lived incandescent light bulbs are phased out. Philips is well placed to thrive in the new era, which requires selling directly to builders, with systems that integrate bulbs and sophisticated light fittings. If European construction ever perks up, Philips could do especially well.
The streamlining continues too. Philips is selling its home-entertainment business to Japan's Funai Electric, for €150-million ($203-billion) in cash, plus licensing fees. This follows an earlier retreat from televisions and leaves Philips making a few higher-margin consumer gizmos such as juicers, electronic shavers, and coffee machines. Still, Mr. van Houten might wonder if further disposals could create value. Sector experts like Spectrum Brands, the U.S. parent of Remington, or Groupe SEB, which owns Moulinex, might be keen.
Based on Monday's close, Philips shares trade at a price of 14.4 times estimated earnings for the next 12 months, Starmine shows. That looks rich. There are no directly comparable companies, but European quasi-rivals Siemens and Schneider trade on forward PE ratios of 12.5 times and 13.8 times respectively.
The transformation is impressive. But much of the good news is already reflected in Philips's share price.