Investing.com -- Philips (AS:PHG) shares dropped over 11% on Wednesday after the company reported weaker-than-expected fourth-quarter earnings, with China emerging as a key area of concern.
The Dutch company saw sales decline 1% compared to consensus expectations, delivering just 1% organic growth versus the anticipated 1.7%.
China was a major drag on results, recording a double-digit decline in the quarter, which weighed heavily on the Personal Health and Diagnosis & Treatment segments.
In Connected Care, we fell 420 basis points short of expectations, even though comparisons were straightforward and sleep system sales outside the U.S. were strong.
The company expects China to remain weak in 2025, forecasting a mid- to high-single-digit sales contraction, including a double-digit decline in the first half of the year.
This outlook is more cautious than those of competitors Siemens (ETR:SIEGn) Healthineers and GE HealthCare (NASDAQ:GEHC), which anticipate only a low-single-digit decline.
Diagnosis & Treatment performance also lagged behind Siemens Healthineers, which posted an 8% gain in the same segment, pointing to potential market share losses for Philips.
Meanwhile, order growth for the quarter rose 2%, fueled by strong demand in the U.S., though gains were offset by continued weakness in China.
Jefferies analysts noted that Philips’ Q4 results were broadly in line with expectations, helped by cost savings of 60 basis points year-over-year.
“Overall, we remain concerned that recent order trends (avg -1% in the past 18M) will put pressure on sales growth well into ’25 (order book accounts for 40% of sales),” Jefferies added.
Earnings before interest, taxes, and amortization came in 1% below consensus, with margins holding steady at 13.5%. For 2025, Philips expects organic sales growth of 1-3%, falling short of analyst expectations of 3.4%.
The company also guided for an EBITA margin expansion to 11.8-12.3%, slightly below the 12.2% forecasted by analysts.
Philips aims to drive further margin recovery through innovation-driven gross margin gains, portfolio streamlining, and increased productivity savings, now expected to reach €2.5 billion over 2023-2025, up from the previous target of €2 billion.
Beyond China, Philips’ capital expenditure trends remain solid, particularly in the U.S., which helped order intake turn positive in Q4.
The company expects to return to normal seasonality in 2025, with sales back-end-loaded and a mid-single-digit decline projected in Q1 due to China and royalty adjustments.
Philips has also provided guidance on free cash flow post-settlements, expecting between €400-600 million in 2025, aligning with analyst consensus of approximately €500 million.
The company’s $1.1 billion settlement last April helped reduce litigation uncertainty, prompting a re-rating, though concerns remain over China’s weak performance and ongoing share losses in Imaging.
BofA Securities maintains a Neutral rating on Philips, arguing that the current valuation—trading at ~19x P/E for CY25 estimates or a less than 15% discount versus Siemens Healthineers (~22x)—fairly reflects short-term hurdles.
While the company boasts high-quality assets in Ultrasound, Image-Guided Therapy, and Enterprise Informatics, analysts believe that fast margin recovery in Connected Care is unlikely until Respironics devices resume sales.