Investors are clearly pleased, sending the stock up almost 4% in trading Tuesday. But aside from the fact that the market knew this was coming, there are execution risks that Philips must overcome, and they won't be easy.
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Philips has discussed plans to reshape itself on more than one occasion, including the June announcement to spin off portions of the lighting business (automotive lighting and LED components) into its own company. That business accounted for 15% of Philips' revenue last year, and the spinoff is expected to be completed in the first half of next year.
On Tuesday, Philips announced more detail. It will have two separate businesses, one that focuses solely on lighting and the other, HealthTech, on health care and technology.
Philips had a 3% decline in health care revenue for the second quarter, showing a vulnerability in that business. Although the company is strong in MRI imaging and CT Scans, GE is a major competitor.
Management said that it is looking at ownership options to grant its new standalone lighting business access to capital markets. The problem though, is that it is tough to gauge what value, if any, the lighting business, which has struggled against General Electric, can produce.
The lighting business continued its two-year history of underperformance with 1% revenue growth during the second quarter -- lackluster improvement that doesn't inspire confidence.