Barron's Shines a Positive Light on Philips

Koninklijke Philips Electronics ADR (PHG) shares have risen 23% since 2006, after moves like outsourcing components and selling its semiconductor business to focus on medical instruments and personal care, home appliances, lighting, and consumer electronics. Yet despite cost-cutting and generating mostly double digit operating margins, the Dutch company still lags some of its industry indexes.

Barron's says Philips will benefit as it finally starts using its €14 billion of cash for focused acquisitions, jettisons minority stakes and implements a €5B buyback plan. The recent €5.3B purchases of health device-maker Respironics and commercial lighting company Genlyte should lift those unit margins respectably. Bulls also think the consumer electronics unit could go; it generates just 3% margins on €10.36B in sales. With all that, EPS should rise more than 30%, to €1.84 in 2008, and then another 15% in 2009. Shares are trading at 14 times forward earnings, where 19 has been the average since 2005. Dividends are rising, from €0.44/share to €0.60 this year, and €0.70 forecast for next year. Philips also garnered 30% of its 2007 sales in emerging markets, seeing explosive domestic and personal care sales growth in India, China, Brazil and particularly Russia. Barron's sees a 30% upside.