Cost-Cutting Creates Net Profits for Electronics Giant (Market Update)
October 12th, 2009
Royal Philips Electronics Beats Forecasts
GOOD MORNING. Stocks in Asia closed mixed today; U.S. futures are pointing to a higher open.
Americans may not be flocking to the malls to buy flat-screen TVs, Blu-ray disc players and kitchen appliances just yet. But things seem to be looking up for Royal Philips Electronics (PHG), the Dutch industrial giant that makes those goods. The firm reported third quarter earnings today that beat analyst forecasts. Net income was 174 million euros, or 19 cents a share, on revenues of 5.6 billion euros. Analysts had predicted a loss of 44.7 million euros. Sales have been improving every quarter for Philips this year, and traders seemed to like the results, sending Philips shares up over 6% today in European trading (though the stock had previously lagged the market).
Does this mean industrial stocks are turning the corner? Not quite, some analysts say. Like many firms beating estimates these days, Philips did it through cost cutting, restructuring and better cash management. The company also issued a cautious fourth quarter outlook, echoing sentiment from other industrials such as General Electric (GE) and Siemens (SI). Philips is more heavily exposed to the consumer market than other industrials and its conservative forecast suggests it’s not seeing a typical recovery in consumer spending. “They’re still under pressure,” says Martin Prozesky, an industrial stock analyst with the research firm Sanford C. Bernstein in London. The top-line outlook was more conservative than expectations, he says, and that suggests the firm may have to keep relying on cost-cuts to beat estimates. Prozesky has an underperform rating on the stock and a price target of 16 euros.
Philips is seeing gains in some of its divisions. Sales of medical imaging equipment to emerging markets are improving, and profit margins improved in its consumer lifestyle division. The company now says it’s close to breaking even in its TV division. And lighting sales have been inching back up, driven by strong growth in Asian markets. Philips even plans to launch a new rice cooker in China this quarter, though analysts say it could be a tough sell for a European brand.
IN OTHER NEWS:
- The private equity firm Blackstone Group (BX) is planning initial public offerings for eight of its portfolio companies and plans to sell five others, according to anonymous sources in news reports. LINK
- Central banks are boosting their foreign currency reserves, but they’re increasingly snubbing dollars in favor of euros and yen, putting new pressures on the buck. LINK
- Numerous companies have awarded stock options to top executives while engaged in negotiations to be acquired, according to the Wall Street Journal. The practice, though apparently legal, typically results in the target firm’s executives receiving a bigger payout when the takeover is later announced.LINK
G’day Mate, How’s Business?
It’ll most likely be a quiet trading day today in the US because of the Columbus Day holiday – and a good time to turn your attention down under. Earlier this month, the National Australia Bank raised its main cash rate by a quarter of a percentage point to 3.25%, making Australia the first major economy to boost interest rates in the aftermath of the financial crisis. Today, the central bank releases its monthly survey of business confidence–an index which has been on the upswing over the last several months.
The Australian economy has rebounded faster than other nations in part because of various government stimulus and policy measures. Australian home prices have gained in the past six months, and the nation’s unemployment rate fell in September, to 5.7%. “They’ve actually weathered the storm fairly well,” says Allan Nichols, an international equity strategist at Morningstar. Local banks were more conservative than those in other countries, and domestic demand has held up relatively well, Nichols says.
What’s more, Asian sovereign wealth funds have invested in Australian natural gas, while Chinese demand for Australian natural resources has helped strengthen major companies like BHP Billiton (BHP) and Rio Tinto (RTP), says William Beuchler, president of Beuchler Capital Asset Management. September’s business confidence index from Australia should be another positive number, he says.
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