Can Philips Investors Find a Light at the End of the Tunnel?

NEW YORK (TheStreet) -- Dutch electronics giant Philips (PHG)  on Tuesday announced plans to split itself into two separate businesses.

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.

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.

Although the split will allow tighter focus for each separate segment, both businesses will still face stiff competition from the likes of General Electric (GE) and Siemens (SIE) .

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.

Factoring in gains that foreign players such as Toshiba  (TOSYY) and Samsung (SSNLF) have made, Philips will need superior product differentiation to maintain or increase its market share.

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. 

And the outlook has gotten dimmer with news that former Tesla (TSLA) engineers have partnered with NASA to rewire the lighting industry with a smarter lightbulb.

Taking the business as a whole, a Zacks analyst recently cited "weakness in operational execution" and rated the shares as "underperform" with a $27 price target, suggesting a downside risk of about 13% from Tuesday's share price.

Philips didn't respond to requests for comment, but during Tuesday's announcement, Frans van Houten, Philips' chief executive, described what he believes to be the right course for the company and said that "the time is right to take the next strategic step for Philips as we continue on our transformation."

Yet the details of that transformation remain cloudy.

Investors who suffered through a 23% drop in second-quarter profits and the year-to-date 19% stock decline are desperate for some good news. And they think that the company's projected cost savings from the spinoff -- about 300 million euros, or about $385 million, by 2016 -- will trickle to the bottom line. 

But for a company that just posted a 6% year-over-year revenue decline, that money is better invested to improve the top line and generate more business.

The question is, how long will it take for management to turn this ship around? And will investors be patient enough to wait to see higher profits or simply a light at the end of the tunnel?

At the time of publication, the author held no position in any of the stocks mentioned.

Follow @Richard_WSPB

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates KONINKLIJKE PHILIPS NV as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate KONINKLIJKE PHILIPS NV (PHG) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its good cash flow from operations, largely solid financial position with reasonable debt levels by most measures, expanding profit margins and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

You can view the full analysis from the report here: PHG Ratings Report

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