Over the past one and a half years, Koninklijke Philips NV (PHG - Analyst Report) has been busy streamlining its massive empire covering lighting, healthcare and consumer electronic goods. The company’s decision in 2014 to part with its Lighting business shocked investors as the earliest memory of Philips has been that of a fine carbon filament lamp seller.
The company reorganized its business into three main segments namely – Personal Health, Diagnosis & Treatment and Connected Care & Health Informatics – in a bid to transform into a healthcare company. Rise in spending on healthcare and fitness buoys our optimism in the stock. Let us focus on the reasons why the concerted efforts to bolster healthcare business leaves Philips with ample upside potential.
Healthcare Business: A Major Profit-Churner
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 boost its stronghold in the healthcare industry. The company’s Personal Health vertical has been witnessing an impressive momentum, mainly fuelled by the rapid market traction of Sleep & Respiratory Care business lines.
Also, the recent product launches in this segment – DreamStation portfolio and connected health technology, Patient Adherence Management Service – are enhancing the company’s strength. Similarly, the Personal Care business is also flourishing. The company remains optimistic that the introduction of state-of-the-art products like OneBlade and Sonicare FlexCare Platinum Connected will manage to pique the interest of masses, thus boosting top line.
In addition to this, impressive image-Guided Therapy and ultrasound equipment sales are acting as catalysts for Diagnosis & Treatment segment. Going forward, Philips believes that higher levels of quality and regulatory expenditure in the second half of 2016, and first half of 2017, will further act as a growth catalyst for this vertical. Also, the recent buyout of digital pathology software products provider – PathXL – looks promising for the Diagnostic and treatment portfolio.
Finally, Connected Care & Health Informatics business is also traversing the growth trajectory, particularly driven by the strength of Patient Care & Monitoring Solutions. The recent collaborations, including the partnership with Medical University of South Carolina Health, for improving patient monitoring and another agreement with Heart Hospital in Tampere, for boosting cardiac care, bodes well for Connected Care portfolio. Also, the company entered into a partnership with Qualcomm Incorporated’s (QCOM - Analyst Report) subsidiary – Qualcomm Life, Inc. – to foster the development of “connected health.”
Favorable Industry Trends
Market reports suggest that national health expenditure is on a rise. Especially, senior citizens constitute the major customer base of healthcare services – they end up spending more on healthcare services compared to the average population. Hence, with an expectation of a rising senior citizens’ population in the years ahead, we perceive that Philips has a strong upside potential and is well poised to capitalize on this expenditure trend.
Moreover, the healthcare sector is relatively immune to the macroeconomic problems faced by other sectors and offers stability to the company amid volatility in the market. This is because even amid tough economic conditions, consumers need to spend on healthcare services, while curtailing discretionary purchases. With factors including solid performance across the entire healthcare portfolio, favorable market trends and impressive product launches, Philips stands to benefit significantly despite competition from biggies like General Electric Company (GE - Analyst Report) and Siemens Aktiengesellschaft (SIEGY - Snapshot Report) .
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