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Phillips Electronics (PHG - Analyst Report) has given a cautionary notice stating that its fourth quarter profits will be impacted by the softness in European markets. The weaker-than-expected demand in Europe has resulted in accumulated inventory, driving up inventory-related charges.  

Fourth quarter earnings are expected to come in approximately 45% lower than the year-ago quarter. During the fourth quarter of 2011, the company reported profits worth €900 million and now it is expected that earnings will be about €500 million. Lower profits are attributable to weak sales across all divisions and unnamed charges for the huge inventory.  

In the last reported quarter, Phillips reported net income of €76 million ($106.9 million). This was lower by €448 million compared to the comparable prior-year period. The significant year-over-year decline in the net income was attributable to lower earnings, lower financial income and a higher loss from discontinued operations.

In June, the lighting division is expected to report a sales decline in the low single-digit range, primarily due to weaker-than-expected market conditions, especially in the Western European consumer and maturing construction markets.

In addition, the Healthcare division is also expected to report softer sales growth in the low single-digit range, attributable to weak sales in Europe and delivery delays. The weakness of the European market is expected to be partially offset by the strength of the Healthcare division in the U.S.

Phillips is not competent to operate in a weak environment. Moreover, all the three divisions of the company face challenges. Management was anyway suspecting a poor performance from the Consumer Lifestyle and Lighting divisions, but now it also expects the healthcare segment to be impacted (although the U.S. is expected to hold up better).

The primary reason for declining healthcare performance is the huge amount of investment costs in equipment due to which its capital expenditure will be under pressure.

Stringent business norms in developed countries and a tough competitive environment driven by large players like General Electric (GE - Analyst Report) and Siemens are expected to impact the company’s revenues and margins going forward.

Phillips currently has a Zacks Rank of #5 which implies a short-term ‘Strong Sell’ rating on the stock.

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