Philips Gathers a Set of Different Medium-Term Risks; Trimming FVE to EUR 35

Narrow-moat Philips' first-quarter results highlighted, once again, the delicate situation the company is going through, with a set of risks coming from different directions. On top of the ongoing respiratory device recall, where provisions were augmented by EUR 165 million, the company faced a 250-basis-point margin headwind from supply chain issues and inflationary pressures, with management highlighting the poor visibility on this front. The U.S. Department of Justice has also sent a subpoena requiring information about the product recall, for which the company faces several class-action lawsuits. Although Philips met consensus expectations in the first quarter, our feeling is that the financial guidance is hanging on a thread, as any minor turbulence on any of the different fronts could put at risk the company's 2022 and medium-term guidance. We believe the market shares our concerns, as the shares have slid more than 10% at the time of the writing.