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Share tip of the week: buy this cheap electronics growth stock
This electronics stock presents a promising long-term growth story, says Paul Hill. And what's more, it's looking very cheap given the prospects. Here's why.
Many investors, spooked by either the currency or insolvency risks of countries such as Spain, have ploughed into perceived safe havens, such as gold. However, as a result of this asset rotation, there are now some genuinely world-class companies trading at attractive valuations for patient investors.
Take Philips, the Dutch healthcare (34% of sales), consumer-product (36%) and lighting (34%) organisation. Last week it reported 2010 revenues of €25.4bn, along with an operating profit margin of 10.5%. That's up from 6.4% in 2009, after a ruthless efficiency drive.
Yet partly because the figures didn't quite match up to stretched analyst estimates, the stock was marked down 5%. The biggest gripes were directed towards its flat-panel TV arm, which reported a €130m loss. To me, this reaction seems unfair as the company offers a great long-term growth story.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
It is the world's largest operator in the expanding home healthcare, men's shaving and lighting sectors. It is also the number-three player in medical scanners. Its technology base is protected by around 50,000 patents, while a third of its turnover is derived from emerging markets the aim is to lift this to 40% by 2015. What's more, the brand name is internationally recognised and at the last count was valued by Interbrand at $8.7bn (or €6.80 a share).
The group's heritage is steeped in successful launches of new innovations. That's why the firm continues to invest heavily in research and development. In particular, Philips wants to take advantage of environmental awareness (eg, power-saving LEDs) and the unmet need for domiciliary medicine as populations age.
Philips Electronics (Euronext: PHIA), rated a BUY by Rabo Securities
Today's performance is just the start of a five-year plan to achieve sustainable improvements in the top line (2% above GDP), profit margins (10%-13%) and capital returns. While shareholders wait for these there's a 3.2% dividend yield to bank (underpinned by net cash of €2bn).
I would value Philips on a sum-of-the-parts basis, prudently assuming the TV division, which generates turnover of €3.15bn, is worthless. I would rate the healthcare, consumer and lighting divisions on earnings before interest, tax and amortisation (EBITA) multiples of 14, ten and 12 respectively. These produce corresponding valuations of €16.6bn, €7.7bn and €10.4bn. After allowing for central overheads of €142m per year and a €1.8bn pension deficit, that all delivers an enterprise value of about €32.7bn, equivalent to €35 per share.
Fine, but are there any catches? There is some tough competition around, particularly from the likes of Sony, Toshiba, Siemens and the Chinese manufacturers. And if there's another recession growth will be affected the lighting unit in particular is tied to the global construction industry. Lastly, for British investors, there are foreign-exchange fluctuations to consider.
All the same, with state-of-the-art science being applied across a broad spectrum of businesses and geographies, the stock rates as a solid buy. Rabo Securities have a price target of €31 per share.
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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
