Q2 losses have cost the electronics giant its star rating. But a breakdown of the figures have given the company reason to remain bright. Geraldine Lambe reports.When Philips Electronics announced an 18% drop in sales and an operating loss in Q2 of E26m last month, its A- rating from Standard and Poor’s immediately began to look vulnerable. Within two days, S&P had reduced the rating to Triple B+, bringing it into line with Moody’s earlier rate cut to Baa1.

“The rating agencies have actually been pretty kind to Philips up to now,” says Rik Fennema, director of credit research at Dresdner Kleinwort Wasserstein. “S&P had given Philips a lot of time to show improvement, but it has taken too long.”

Fallen profits

Although it had recorded a headline net profit figure, the company’s performance at the operating level has remained disappointing. Management has continued to cut costs, but this has enabled it to offset earnings weakness for a finite period only. However, this significant fall in sales was not a huge surprise to the market, a fact that is reflected in its spreads, because the company is exposed to the weakening dollar. Equally, Philips has been divesting assets, which also accounts for a chunk of sales losses.

“If you strip out the currency effect, then the 18% drop is reduced to 5%,” says Mr Fennema. “Another 4% of the drop can be accounted for by divestment of assets, so the sales decline is only 1%.”

Therefore, although the figures are not as bad as they first appear, the company’s performance is still not particularly strong. It generated an underlying profit of E58m from a sales level of E6.5bn (taking out the special charges of E84m), so the profit margin remains thin. “The company has been quite active in cutting costs, but clearly not enough to boost results yet,” says Mr Fennema.

Focus on strengths

Of the company’s five main business lines – lighting, domestic appliances, consumer electronics, semi-conductors and medical equipment – Mr Fennema says the most likely areas for improving results are the latter two. The first two, he says, are relatively stable and have performed quite well, while consumer electronics continues to be pressurised by weak consumer spending.

On the other hand, Mr Fennema says the semi-conductors division has been loss-making for quite a while, but the company expects to have taken enough costs out by Q4 that it can return to break even levels, which is a significant improvement already. In medical equipment Philips is now one of the world’s top three providers and last year’s results were depressed by integration charges. “We are cautiously optimistic that the company will be able to improve its credit profile this year,” says Mr Fennema.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter