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Philips Electronics NV - ADR (PHG)

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We are downgrading our recommendation on Koninklijke Philips Electronics (PHG) to Underperform with a $16 target price. The company had a weak second quarter with revenues declining 3.4% primarily due to lower license revenues and a decline at the Lifestyle Entertainment segment.

Furthermore, the company posted a net loss of $1.9 billion during the recently concluded quarter due to a goodwill impairment charge of $2.0 billion. The net cash flow also declined significantly compared to the prior year, attributable to higher working capital outflow related to higher vendor payments.

Our long-term Underperform recommendation on the ADRs indicates that they will perform below the broader U.S. equity market over the next six to twelve months. Our target price is $16.00 or 14.5X 2011 EPS, which is well within the historical range.

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