Shares in Philips (PHIA) are up 30% on news of a $1.1 billion (£887 million) settlement in US class action lawsuits with patient organisations over personal injury claims – and with the US medical regulator, who in return will waive further claims. For this, Philips has created a provision of €982 million (£839.9 million) in the first quarter.
In addition, Philips says it will receive €540 million from its insurers to settle product liability claims.
This agreement ends significant uncertainty over the company's legal liabilities, says Morningstar analyst Javier Correonero.
He adds that investors were likely anticipating a higher settlement amount. Indeed, ING analysts previously assumed the provision would amount to €3 billion, so today's share price bounce is probably one of relief rather than celebration.
Philips shares opened a spectacular 37% higher, after which they narrowed slightly to a still-whopping 28% at €25.44. At the time of writing shares are up 33% to €26.29.
Key Morningstar Metrics For Philips Shares
• Morningstar Rating: 3 Stars
• Fair Value: €21
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: High
Order Intake Squeezed by China
It's not all good news. Philips faces an order intake squeeze, and orders have fallen for a successive six quarters. For the first quarter of 2024 they were down -3.8%, the seventh consecutive quarter of decline. Chief executive Roy Jakobs says China is to blame. Excluding China, order intake actually grew.
The €982 million provision for the US settlement (with two other provisions for Respironics totalling €1.1 billion) also somewhat distorts the results, as it leads to a net loss in the first quarter of €998 million, compared to a €665 million loss in the first quarter of 2023, when it included €868 million in provisions.
What to Expect From Philips Results
Philips has now raised its expectation for free cash flow in 2024 to between €900,000,000 €1.1 billion. That includes the insurance payout, but not the settlement in the patient class action, which will now be paid out in 2025.
Furthermore, Philips assumes comparable sales growth of 3-5% and an adjusted EBITDA margin of 11-15% for 2024. In the first quarter, those were 2% and 9.4%, respectively.
Fair Value Estimate on Philips Stock
Correonero maintains his Fair Value estimate of €21 per Philips share.
The settlement is good news, he says, but Philips still faces long-term headwinds and reputational damage from this issue, which will result in a permanent loss of market share, as a multi-year consent decree with US medical authorities will prevent Philips from selling new devices for several years.
This article was originally translated from our Dutch sister site and has been edited and republished for UK audiences