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Electronics - Why You Should Give This Recovering Industry Giant a Chance
Posted by: Patricio Kehoe (IP Logged)
Date: November 26, 2013 10:25AM
When it comes to consumer electronics, fierce competition is the norm. The lucrative sector has seen newcomers rise and fall, and giants struggle, as innovation is a never-ending challenge. Companies such as Panasonic Corporation (PCRFF) and Royal Philips NV (PHG) have both put expansion strategies in place, in order to keep up with rivals. In order to achieve better earnings, the first is heading towards the automobile industry, while the latter is focusing on health-care.
Electronics in Automobiles: A Forward-Looking Strategy
Panasonic is a Japan-based electronic equipment, systems, and component manufacturer with a global reach. Over the coming year, the company is expected to benefit from a depreciation of the Yen, and is expected to bounce back from its troubled situation, as it enters new industry categories. A recent deal with Tesla Motors Inc (TSLA) for example, has landed the firm a contract for 2 billion lithium-ion batteries, which are to be delivered over a four-year period.
Although Panasonic’s revenue is generated mainly through consumer electronics, the new deal with Tesla seeks to initiate a period of diversification. Since competitors such as Sony Corporation (SNE) , Sharp Corporation (SHCAY) , and Samsung Electronics (005930) are performing well in the consumer electronics segment, the firm anticipates it will be extremely difficult to harness further market share. The four-year-long deal might not make a huge difference in Panasonic’s balance sheet, yet it is surely a positive move that could lead to further dealings in this new sector. Also, tying itself to Tesla could be a very smart decision, as the U.S. car manufacturer’s sales are booming, with no obstacles in the way.
Panasonic has also abandoned certain sectors, such as the flat-panel television business, in order to escape increasing commodity costs. The firm now seeks to close its plasma display segment, in order to focus more on the automotive sector, which grew by 6% in terms of revenue this year. As profitability rose by over 100% year-over-year, the new niche the company has found for itself seems promising.
In addition to this new diversification strategy, Panasonic traditionally boasts strong distribution channels, and a truly global footprint. Yet apart from reaching customers at a lower cost than rivals, the company is also looking to become the industry’s leading provider of green technology by 2018. Investment gurus might not be thrilled about this stock, and recent performance has been very poor, yet at $10.85 per share this company is worth taking into consideration. I feel quite bullish regarding Panasonic as cheap, long-term investment.
Debt Pressure, Rash Expansion, and Simply Too Expensive
Royal Philips is a global manufacturer of consumer goods, with its business divided into three main sectors: lighting, healthcare, and consumer lifestyle. As the company pushes to dominate these industry segments, good results have not been missing: organic revenue increased 3% over the course of the third-quarter of 2013. Nevertheless, cash flow dropped 75% as expansion efforts took a toll on profitability.
Much like Panasonic, Royal Philips was not pleased with its market position, and began acquiring and divesting in different areas. Its newly gained positions in the health-care products, and consumer lifestyle segments, are bound to produce good long-term results, yet the rise in debt levels is concerning. Margins must be maintained in line, unless the company wishes to face the burden of excessive investment in long-term projects.
Overall, the global push for energy efficiency, and cheap health care products, should result in a great advantage for Royal Philips. As a leader in LED lighting for example, the firm will surely benefit from initiatives such as the retrofitting of old buildings with new lighting systems. The firm’s position as third largest medical diagnostic equipment manufacturer, on the other hand, means Royal Philips can achieve a low-cost production of X-ray, ultrasound, magnetic resonance, and medical information technology. Cost reduction plans, such as the Philips Business System, which is set to save the company around $500 million, must also be factored in the equation.
Despite this rosy outlook, integration of newly completed acquisitions, such as InnerCool Therapies Inc., will weigh on Royal Philips, especially if its brands fail to deliver. Also, with the stock currently trading at 59.3 times its trailing earnings, entry is very expensive. The 222% price premium investors must pay for, is simply too high. And, some investment gurus, such as Mason Hawkins, a major shareholder of Royal Philips, believes now is a good time to cash out. The recent sale of around 17% of his stake in the company came at a great time: with the stock trading at around $35, up from $19.44 in November 2011, large increases in share price are not expected. Overall, I feel optimistic regarding the company’s future, yet point for entry has simply passed, making an investment not a prudent choice.
A Smart Investment
Despite Royal Philips’ great outlook, it doesn’t seem to be a savvy investment due to its elevated share price. As debt pressure will weigh on the company, share prices are simply not expected to grow enough to make the investment worthwhile at this point. Panasonic shares on the other hand, are available at less than a third of Royal Philips’ common stock value, and yet have ample room for growth. Due to an interesting forward looking plan, and smart expansion moves, I feel bullish regarding the Japanese firm, which has has already seen share price increase by over 100% over the past year.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
Stocks Discussed: PRCFF, PHG, TSLA, SNE, SHCAY, 005930,