Koninklijke Philips Morningstar Report

Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:15, UTC | Reporting Currency: EUR | Trading Currency: EUR
| Exchange: EURONEXT - EURONEXT AMSTERDAM Page 1 of 22
Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC
Last Price Fair Value Estimate Price/FVE Market Cap Economic MoatTM Equity Style Box Uncertainty Capital Allocation ESG Risk Rating Assessment1
20.14 EUR 25.00 EUR 0.81 18.35 EUR Bil Narrow 2 Large Blend Medium Standard ;;;;;
15 Sep 2023 12 Oct 2022 13:50, UTC 15 Sep 2023 6 Sep 2023 05:00, UTC
Price vs. Fair Value
Fair Value: 25.00

12 Oct 2022 13:50, UTC
40
Last Close: 20.14
30 Over Valued
Under Valued
20
10
0
2018 2019 2020 2021 2022 YTD
0.74 1.04 1.15 0.78 0.56 0.81 Price/Fair Value
0.60 43.45 2.64 -23.51 -55.05 50.20 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 12 Oct 2022 13:50, UTC.
Contents
Business Description Reducing Our Philips FVE to EUR 25; We Expect a Weak 2022
Business Strategy & Outlook (12 Oct 2022)
Bulls Say / Bears Say (12 Oct 2022) and 2023
Economic Moat (12 Oct 2022)
Fair Value and Profit Drivers (12 Oct 2022)
Business Strategy & Outlook Javier Correonero, Equity Analyst, 12 Oct 2022
Risk and Uncertainty (12 Oct 2022)
Philips is a one-stop shop for imaging-related devices with an established footprint in many hospitals,
Capital Allocation (25 Jul 2022)
Analyst Notes Archive which positions it to benefit from long-term healthcare trends like the transition to non- or minimally
Financials invasive procedures, increased hospital demand for efficiencies, or detection of sleep apnea. Through
ESG Risk several divestitures and acquisitions, Philips has transformed itself from an industrial-medical
Appendix
conglomerate into a healthcare company and primary supplier across hospitals, which facilitates the
Research Methodology for Valuing Companies
introduction of new products and the displacement of smaller suppliers with more depth in a single
Important Disclosure
product line but lack of breadth. In many of its underlying markets, the company operates an oligopoly
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and where significant market share is controlled by a few players. Several of the company’s products require
Investment Research Policy. For information regarding conflicts of interest, please
visit: http://global.morningstar.com/equitydisclosures. proprietary software or service, which provide stability to cash flows and help to lock in the customer. In
The primary analyst covering this company does not own its stock. addition, the company has carried out several divestments and acquisitions, which we believe has
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk
1 reinforced its positioning. The company continues to narrow its business focus, selling its domestic
Rating.
appliances business in 2021.
We believe the company has room to improve its margins through improved operations management
and cost efficiencies. Philips has made inroads here with a manufacturing footprint consolidation,
moving from 50 factories to less than 35 in five years. In diagnosis and treatment, Philips has a large
installed base built during many decades, which we believe has potential for improved service retention
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Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:15, UTC | Reporting Currency: EUR | Trading Currency: EUR | Exchange: EURONEXT - EURONEXT AMSTERDAM Page 2 of 22
Sector Industry
d Healthcare Medical Devices rates through remote monitoring, product sophistication, and risk-sharing agreements. In connected
care, Philips had a significant product recall on its sleep apnea installed base in 2021, which we believe
Business Description
Philips is a diversified global healthcare company will result in a permanent loss of market share against ResMed. We see a long-term conversion
operating in three segments: diagnosis and treatment, pathway in toothbrushes from manual to electric, as a large percentage of the population still brushes
connected care, and personal health. About 50% of the manually. We believe the monitoring market will be a long-term beneficiary of COVID-19 as hospitals
company's revenue comes from the diagnosis and
realize the need for efficiencies in patient management when hospital occupancy is high.
treatment segment, which features imaging systems,
ultrasound equipment, image-guided therapy solutions
Bulls Say Javier Correonero, Equity Analyst, 12 Oct 2022
and healthcare informatics. The connected care segment
u Philips' large installed base in imaging devices and existing footprint in many hospitals is an advantage
(27% of revenue) encompasses monitoring and analytics
systems for hospitals and sleep and respiratory care that allows it to cross-sell and introduce new products with less effort than other smaller players.
devices, whereas the personal health business u Philips is a leader in large unpenetrated markets such as sleep obstructive apnea and electric
(remainder of revenue) includes electric toothbrushes toothbrushes, where there are significant growth opportunities.
and men's grooming and personal-care products. In
u Divestments are reducing the conglomerate perception Philips has among investors, which will provide
2021, Philips generated EUR 17.2 billion in sales and had
more visibility on cash flows and future growth opportunities.
80,000 employees in over 100 countries.
Bears Say Javier Correonero, Equity Analyst, 12 Oct 2022

u The continued transition to value-based care in many parts of the world will result in structural price
declines for Philips' imaging business.

u Despite being good capital allocators, Philips management has a poor record of setting financial
guidance, with many profit warnings in the past five years. This reduces its credibility on financial
targets.
u There is uncertainty on the product recall situation of Philips' respiratory devices. This has caused
reputational damage to Philips and benefited its main competitor, ResMed.
Economic Moat Javier Correonero, Equity Analyst, 12 Oct 2022

We believe Philips holds a narrow moat rating supported by switching costs and intangible assets.
Many of Philips' products perform critical medical functions that require a significant amount of
practitioners' and technicians' training time, so the rationale for an equipment or service change is low.
Philips products are also supported by patents and proprietary technology supported by a long research
and development history in imaging technologies.
In its diagnosis and treatment division, Philips holds a narrow moat due to switching costs and
intangible assets. In our opinion, diagnostic imaging (MR/CT/X-ray) is Philips' moatiest subsegment
within D&T. The critical nature of imaging devices makes hospitals reluctant to change suppliers.
Imaging devices play a critical role in early disease detection; therefore hospitals seek equipment
suppliers with a record and reputation for reliable and durable equipment. Service attachment rates for
OEMs of imaging equipment are high for the same reason: minimizing equipment failures with hospitals
preferring to rely on OEMs for equipment maintenance. The high cost of some imaging systems (an MR
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Competitors
Siemens Healthineers AG Registered
Koninklijke Philips NV PHIA General Electric Co GE Siemens AG SIE
Shares SHL
Fair Value Fair Value Fair Value

25.00 118.00 166.00 Last Close
Uncertainty : Medium Uncertainty : High Uncertainty : Medium 46.33
Last Close
Last Close 115.49 Last Close
20.14 138.10
Economic Moat Narrow Narrow Wide —

Currency EUR USD EUR EUR
Fair Value 25.00 12 Oct 2022 13:50, UTC 118.00 8 Aug 2023 21:45, UTC 166.00 13 Sep 2023 14:35, UTC ——
1-Star Price 33.75 182.90 224.10 —
5-Star Price 17.50 70.80 116.20 —
Assessment —— Fairly Valued 15 Sep 2023 Under Valued 15 Sep 2023 ——
Morningstar Rating QQQQ16 Sep 2023 00:10, UTC QQQ15 Sep 2023 21:18, UTC QQQQ15 Sep 2023 23:53, UTC ——
Analyst Javier Correonero, Equity Analyst Joshua Aguilar, Senior Equity Analyst Matthew Donen, Equity Analyst —
Capital Allocation Standard Exemplary Exemplary —
Price/Fair Value 0.81 0.98 0.83 —
Price/Sales 1.05 1.56 1.41 2.35
Price/Book 1.51 4.03 2.38 2.92
Price/Earning — 12.50 12.30 31.59
Dividend Yield 4.34% 0.28% 3.12% 2.12%
Market Cap 18.35 Bil 125.87 Bil 108.03 Bil 50.22 Bil
52-Week Range 11.61—20.94 48.29—117.96 95.07—167.00 40.53—58.00
Investment Style Large Core Large Growth Large Core Large Core
machine can cost up to EUR 8 million and a CT scanner up to EUR 2 million) requires hospitals to
maximize utilization rates and reduce downtime, as a prolonged interruption can have implications for
hospital profitability and waiting times. An MR/CT machine typically lasts 10 years, but its life can be
prolonged with some refurbishing to delay capital outlays, a service Philips also offers.
Philips' long-standing relationships with medical professionals increases hospitals' and practitioners'
loyalty. The company assists and advises hospitals in matters such as technical training on how to
operate imaging machines, on-site support, how to achieve cost and time efficiencies and runs long-
term partnerships with many of them. These relationships result in switching costs, as relations become
sticky and changing equipment would require a significant amount of money and time in retraining
personnel. Many imaging systems come with incorporated proprietary software, so changing suppliers
implies retraining doctors in a new interface with which they might feel less comfortable during an
intervention.
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Transition toward value-based care together with hospital purchasing alliances have been affecting the
prices of imaging devices for more than 10 years. Some of the procedures related to Philips machines
experienced reimbursement declines of 40%-50% from 2008 to 2014, and have stabilized since. Philips'
imaging devices have experienced 1%-2% annual price deflation for many years, but we believe price
pressures are partially eased by the critical nature of these machines, a high cost of failure and
switching costs. Medical imaging equipment is an oligopoly where Siemens, General Electric, and
Philips have 70% market share worldwide, so there aren't many suppliers that hospitals can turn to.
Philips is one of the market leaders in ultrasound systems. Even though the ultrasound market has lower
barriers to entry and less potential for service revenue compared with MR and CT, Philips has carved out
a strong position in the higher end of the market, with leading technology supporting good margins. The
company is expanding to the lower end of the market, where GE leads. Although switching costs are
lower than in MR/CT/X-ray (machines are less complex), Philips has built a strong brand, maintaining a
leading position based on innovation. Notwithstanding its brand reputation, pricing pressure from Asian
and Western players has been increasing.
In image-guided therapy, or IGT, Philips is present throughout the value chain for blood-vessel devices,
with solutions aimed at both diagnostics and treatment. Philips' IGT portfolio includes strong technology
with well-established products in many of the world's leading hospitals. Although switching costs for
many of Philips IGT procedures are low, practitioners hold the upper hand over the hospital
administrators. Physicians can be brand loyal due to their perceptions of clinical risk when switching
suppliers. In IGT Philips also sells C-arms for cardiac interventions, where we suspect reliance on Philips
for service and software is high.
We believe the monitoring and analytics division holds a wide moat supported by switching costs.
Philips systems are deeply embedded in hospital workflows and changing them would take time, in
addition to possible disruptions in hospital operations. Thanks to these systems, doctors can access
patient data at any location, get automatic updates on a patient's status and get real-time alarms in
case something unexpected happens. This allows hospitals to gain efficiencies by reducing duplicities,
personnel costs and freeing up doctors' and nurses' time from redundant activities. In an environment
where hospital reimbursement is being pressured (moving from fee-for-service to bundled payments)
gaining efficiencies will be fundamental and hospitals that rely on these systems will remain high. We
believe hospitals' reliance on these systems is also demonstrated by their acceptance of annual price
increases by Philips.
There are different submarkets in the patient monitoring market. Philips is the leader in the
multiparameter vital signs monitoring market by selling monitors, wearable biosensors and real-time
monitoring solutions. Philips' main focus is on ICUs, although they are expanding to lower acuity areas.
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Philips monitors provide doctors with the vital signs, waveforms and other parameters from the patient
in real-time. This data is then sent to Philips patient information center, which allows doctors to monitor
all the patients in real-time under the same screen, sends copies to the electronic medical record, or
EMR, to store the data and provides alarms and regular updates on the status of patients. Philips also
sells portable systems that allow hospitals to shift the patient from intensive care units to normal wards
without switching off the patient monitor systems, avoiding the loss of data. GE is one of Philips' main
competitors in the U.S, where Philips has 50% market share compared with GE's 15%. Nihon Kohden
(Japan) and Mindray (China) compete in this same market, although their main geographical areas are
different. Mindray provides the hardware but is weaker on software, where the switching costs are
higher.
In the sleep and respiratory care division Philips sells devices to treat diseases such as obstructive sleep
apnea or chronic obstructive pulmonary disease. We assign a narrow moat to this division supported by
a strong brand and switching costs. In the OSA market, Philips and ResMed operate a duopoly, with
Philips being number two. OSA is a serious disease, which consists of the respiratory tracts being
blocked while you rest and over the long term can cause strokes, atrial fibrillation or heart failure.
Philips' masks benefit from being connected devices, which give patient feedback and encourages
patient compliance, reduce reimbursement risk, and allow practitioners to monitor patient data. In the
COPD market, Philips sells medical ventilators, oxygen devices, nebulizers, and others. Some of these
products carry out extremely critical functions during the treatment of a respiratory disease. Ventilators,
for example, are invasive products that need a very careful application as they replace the lung function
and a failure could cause death. Professionals in this field have years of training and experience, so
changing equipment would require a big amount of time and retraining, resulting in high switching
costs for hospitals. Overall, we believe practitioners prefer to stay with established brands, which they
know and that can assure a safe treatment and peace of mind.
In its personal health division, Philips competes in the electric toothbrush, men's grooming, and
personal beauty markets. While Philips is positioned in the more resilient high-end part of these markets
and has good brand recognition, we don't believe its returns are protected by a moat.
In the electric toothbrush market, Philips competes mainly with Oral-B products from Procter & Gamble.
Both companies hold the number-one and number-two market positions in different geographies.
Philips is the leader in the U.S. market whereas P&G is the leader in Western Europe. The potential for
growth and further penetration in this market is high (only 20% of the world's population uses electric
toothbrushes) but capital and intellectual property barriers to entry are low. Therefore, we see potential
for competitive disruptions in this market within our 10-year narrow moat time frame.
We believe the competitive dynamics to be similar in the personal beauty subsegment, where Philips
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competes in the male grooming and women's hair removal markets. Once again P&G is Philips' main
competitor with its Braun brand. Philips' product portfolio is focused on the electric and hybrid hair
removal subsegments. While the higher-end electric-shaving market is more resilient than the manual
shaving one and shows certain brand loyalty, it requires continued marketing and R&D spending to keep
sales up, and we don't have full certainty that the competitive landscape will be the same in 10 years.
Fair Value and Profit Drivers Javier Correonero, Equity Analyst, 12 Oct 2022
We are reducing our fair value estimate to EUR 25 per share from EUR 33 given the company's bleak
outlook for 2022 and 2023 and its struggles to improve operating performance. On top of the sleep
apnea device recall started in 2021, Philips is seeing important headwinds from supply chains in 2022,
and we have low confidence in targets set by management after many profit warnings since 2018. This
poor operating performance contrasts with that of peer Siemens Healthineers, which has performed
much better in the same challenging macroeconomic environment. We model weak sales and margins
in 2022 and 2023 and have reduced our adjusted EBIT margin forecast in 2026 to 9.7% from 10.6%,
given the company's struggles. We have long said that management's midterm targets set for 2025
were too optimistic, and we have historically remained more conservative.
In diagnosis and treatment, we assume further penetration of MR/CT scanners in hospitals, as countries
like China or the U.K. just have 6 MR units per million people compared with 40 in the U.S. Europe will
go through a replacement cycle in the following years. However, volume gains will be partially offset by
pricing declines derived from transition- to value-based care. Imaging equipment is a large expense for
hospitals which means it is usually a target for cost reductions. In ultrasound and image-guided-
therapy, we assume high- to mid-single-digit growth long-term.
In connected care, we assume mid-single-digit growth in monitoring long-term. Large hospitals and
ICUs are the organizations that can make the most out of Philips' monitoring solutions, as they usually
have larger cost bases and therefore seek efficiencies. We assume slightly higher growth rates than
historically for the monitoring business, as we believe COVID-19 has been a trigger for hospitals to
realize efficiencies from having remote monitoring systems.
In sleep and respiratory devices, we expect a structural loss of market share against ResMed after the
sleep apnea product recall started in 2021. However, we expect Philips to remain the second-largest
player worldwide after ResMed. The sleep apnea market is largely unpenetrated, so we believe there is
room for long-term growth.
In personal health, we assume mid-single-digit growth in the long term. The electric toothbrush market
has much room for further penetration as the shift to electric toothbrushes continues.
Risk and Uncertainty Javier Correonero, Equity Analyst, 12 Oct 2022

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We assign Philips a Medium Morningstar Uncertainty Rating. The company operates in cyclical end
markets such as imaging scanners, which can cost several millions of euros per unit so hospitals may
delay purchases when economic conditions weaken, and the personal health division, where demand
for products is tied to the overall health of the economy. However, this cyclicality is partially offset by
40% of D&T revenue derived from recurring software and service. On the other hand, we believe the
connected care division is more stable through the cycle as its systems are deeply embedded in hospital
IT systems.
One of the main risks Philips faces is the pricing pressure derived from a transition from fee-for-service
healthcare systems to bundled payments. Hospital reimbursement from Medicare and insurers has been
pressured for years, which has squeezed hospitals margins which try to pass these pressures on to its
suppliers. Philips is especially exposed to this trend as some of the equipment it sells is expensive and is
one of the targets for hospitals' cost reductions (a MR machine can cost up to EUR 8 million and a CT
scanner up to EUR 2 million). Some MR/CT/X-ray procedures reimbursement in the U.S. declined up to
50% during 2008-14.
Another main source of uncertainty is the product recall Philips is carrying in its sleep apnea installed
base, which we believe carries reputational risk. Some of Philips’ customers used nonrecommended
cleaning solutions, which degraded the foams in the products. If inhaled, the air from these devices
could be toxic for patients.
Philips has a low environmental, social, and governance risk profile. One open case is an SEC
investigation into whether Philips and its peers bribed Chinese and Brazilian officials to win new
business. Although we don't have indications of what the amount of a potential fine could be, we
believe Philips could comfortably meet it, given its solid financial position.
Capital Allocation Javier Correonero, Equity Analyst, 25 Jul 2022

We rate Philips' capital allocation rating as Standard. The company’s capital allocation strategy has
been heading in the right direction since the arrival of CEO Frans Van Houten in 2011. At that time,
Philips was a huge conglomerate that manufactured a disparate range of products like TVs, lightbulbs,
electric toothbrushes, and kitchen appliances like fryers and blenders, in addition to medical equipment
like MR/CT/X-ray, ultrasound devices and hospital IT systems. Since 2011, management has divested
the less moaty and less cash-generating divisions like TVs, lightbulbs (Signify), and domestic appliances
(2021).
The company has been using the proceeds of these divestments to reinvest in what we consider to be
its major strength, its medical business, both organically and inorganically. On the organic side, Philips
has increased its R&D investments from 6%-7% of revenue in 2011 to almost 10% as of 2021, with the
majority of it being invested in diagnosis and treatment, and connected care, but without neglecting its
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personal health business, which has performed well for many years. On the M&A side, Philips has
completed the transactions of Volcano and Spectranetics in the catheter-lab segment and has improved
both companies' margins with volume growth thanks to Philips' already existing footprint in many
hospitals. We believe the price paid for these companies (3 times sales for Volcano and 7 times sales for
Spectranetics) was fair, considering Philips has increased revenue and improved margins. In 2018,
Philips also completed the acquisition of EPD Solutions, where the intellectual property acquired
enhanced Philips' technology, but where the multiple paid was high (above 15 times sales). In 2021,
Philips acquired BioTelemetry, which specializes in wearable biosensors, a good complement for the
connected care unit. These acquisitions expand the breadth of Philips' portfolio, making it a one-stop
shop for imaging-related devices and increasing Philips' footprint inside the hospital. We believe the
Volcano and Spectranetics acquisitions are already cash flow-accretive to the company and will
continue to be in the medium term. Midsize acquisitions are also complemented with many bolt-on
ones.
Philips has a healthy balance sheet with a manageable level of debt of 1.6 net debt/EBITDA as of
December 2021. We believe there is room to increase this indebtedness level in case there are any
value-creating M&A opportunities. The company has been distributing cash and share dividends for
many years, with the share count expansion derived from share dividends being offset with share
repurchases. We believe the balance between reinvestment and dividends/repurchases to be
appropriate.
For several years, Philips has been reinvesting to enhance its strengths, but some of its underlying
markets may not offer enough growth opportunities to reinvest as much as the company would like. The
imaging market in Europe has flat characteristics; new sales come mainly from the replacement of old
machines. Something similar happens in the U.S. The opportunities for reinvestment in the obstructive
sleep apnea market are high, as only 20% of the worldwide population who suffer from this disease are
aware of it, so the potential for further penetration is huge. The same happens in the electric toothbrush
market, as 70%-80% of the worldwide population still brushes manually.
Analyst Notes Archive
Philips Earnings: Beats Expectations and Lifts 2023 Outlook, but Uncertainty Weighs on Shares
Javier Correonero, Equity Analyst, 24 Jul 2023
Narrow-moat Philips beat company-provided consensus expectations for the second quarter and also
raised its financial outlook for the full year. The company achieved a 9% organic growth rate driven by
all segments and geographies. The strongest contributor was the diagnostics and treatment division
(almost 50% of revenue), which reached 12% organic growth thanks to ultrasound and image-guided
therapy devices. In the personal health division, sales grew 3% organically with a 13.4% EBITA margin,
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up 100 basis points year over year.
Philips also did better than expected on the profitability side, booking EUR 453 million in adjusted EBITA
for a 10.1% margin (versus consensus of EUR 394 million). Sales growth, a favorable product mix, and
an improvement in global supply chains helped EBITA margin expand almost 500 basis points year over
year. Management lifted its guidance and now expects sales growth in the midsingle digits for the full
year (up from low single digits) and EBITA margin of close to 10%. We are not surprised by this, as
Philips had already recorded a strong start to the year in the first quarter. We are maintaining our EUR
25 fair value estimate.
Despite the beat, the shares are down around 5% at the time of the writing. We believe this is explained
by the uncertainties the company still faces. First, Philips is facing lawsuits in many countries after the
product recall in its Respironics division, and the amount of money it will have to pay is still uncertain; it
recorded a EUR 575 million provision in the first quarter. Second, the company's second-quarter results
benefited from improved supply chain conditions after problems on this front, but we believe this is
explained by a general improvement in the situation rather than by any Philips-specific actions.
Philips Earnings: Stock Rises 11% After Beating Consensus; Diagnostics and Treatment the Outlier
Javier Correonero, Equity Analyst, 24 Apr 2023
Narrow-moat Philips reported a very strong first-quarter performance that exceeded company-compiled
consensus. Philips achieved adjusted EBITA of EUR 359 million, equivalent to an 8.6% margin, a
significant improvement from 6.2% in the same period last year and also compared with previous years.
Margin expansion was primarily driven by robust organic sales growth of 6% year over year, which
resulted in operating leverage and productivity enhancements that resulted in total savings of EUR 190
million and supply chain improvements that enabled double-digit growth in diagnostics and treatment.
We are pleased with Philips' cost-cutting efforts; the company has already laid off 5,400 workers out of
its target of 10,000. On the supply chain front, we believe easing will come from overall global
improvements rather than company-specific action as Philips has struggled with supply chain
management for years. We maintain our EUR 25 fair value estimate.
Despite impressive first-quarter results, Philips' management did not revise their annual outlook, which
we consider a prudent move given their historically poor track record in setting guidance. Therefore, we
support management's conservatism in this regard, with our projections aligned with 2023 guidance.
Income from operations was negative EUR 583 million, primarily due to EUR 575 million provisions for
accelerated restructuring and litigation costs relating to the Philips Respironics recall. We believe the
stock price surged by 11% as a response to the expansion in margins, double-digit order intake growth
in diagnostics and treatment, and successful cost-reduction measures. At current levels shares still offer
30% upside.
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Philips Cuts 6,000 More Jobs, but Still Has To Prove Its Turnaround Strategy; Maintain EUR 25 FVE
Javier Correonero, Equity Analyst, 30 Jan 2023
Philips reported fourth-quarter 2022 results together with a medium-term strategic update. Shares are
up 7% on Jan. 30 as Philips announced an extra 6,000 job cuts (in addition to 4,000 already announced
in October) and organizational changes. Investors have been concerned in recent months about Philips'
company-specific issues such as the sleep and respiratory product recall, ongoing supply chain issues,
and lack of action. Management has also taken a more conservative stance on midterm guidance
compared with what it did in its 2020 capital markets day. The guided range for sales growth and
margin expansion is now wider, providing more room for inaccuracies in forecasting. Philip’s
management has been weak in meeting its own financial targets recently, which were either too
optimistic or didn’t consider external factors like supply chain issues. We maintain our EUR 25 fair value
estimate.
Philips announced cumulative EUR 2.0 billion cost savings until 2025. Of these, 50% come from
workforce and internal cost reductions with a further 20% coming from manufacturing and R&D
optimization. The remaining 30% comes from procurement savings, where we are more skeptical given
these cost measures are normally more difficult to achieve. On the supply chain side, where Philips
struggled recently, measures sounded vague to us and we lacked more specific details on operations.
Our medium-term forecasts until 2025 are aligned with management’s guidance, but we are more
conservative in the longer term as we remain in the low-teens-adjusted EBITA margin while
management guides for mid- to high teens. In its diagnostics and treatment division (40% to 50% of
revenue and profits) Philips has structural differences with its peers such as weaker operational
performance, a smaller installed base, and higher proportion of ultrasound revenue, which comes at a
lower margin. This, together with management’s inaccuracy in forecasting, makes us reluctant to
believe this long-term guidance.
Philips' Third Quarter Weak, as Anticipated Last Week Javier Correonero, Equity Analyst, 24 Oct 2022
As already announced last week in a profit warning, Philips' results for the third quarter were weak.
Supply chain issues are affecting product deliveries and installations, which has resulted in an organic
mid-single-digit decline in sales. Management also downgraded its previous 2022 adjusted EBITA
margin guidance of 10%, which would indicate a margin in the midsingle digits for the full year. Last
week, we reduced our fair value estimate to EUR 25 per share from EUR 33, as we have trimmed our
midterm revenue growth and margin expansion forecasts. Philips also announced Oct. 24 it will cut
4,000 jobs worldwide (the employee base is around 80,000), a measure we look favorably upon given
the poor performance seen recently.
By division, diagnostics and treatment organic sales decreased 2% year over year, although order book
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increased 3%, one of the few good news items. The connected care unit saw an organic decline in sales
of 15%, given the triple-digit growth seen in the third quarter of 2021. The personal health division
managed to grow 4%, driven by North America and Europe.
For more insight into Philips' recent performance check our Oct. 12 note, "Reducing Our Philips FVE to
EUR 25; We Believe Management Has a Real Credibility Issue."
Reducing Our Philips FVE to EUR 25; We Believe Management Has a Real Credibility Issue Javier
Correonero, Equity Analyst, 12 Oct 2022
Profit warnings seem to be the norm rather than the exception in Philips’ fiscal 2022. In a short press
release and a call, management downgraded its 2022 guidance as a result of supply chain issues that
are affecting product deliveries and installations. It is the fourth profit warning in 10 months. We expect
sales to decline by midsingle digits organically year over year, compared with management’s previous
guidance of 1%-3% organic growth. Management also downgraded its previous 2022 adjusted EBITA
margin guidance of 10%, which would indicate a margin in the midsingle digits. Philips took a EUR 1.3
billion goodwill-impairment charge based on a consent decree proposed by the Food and Drug
Administration for the settlement of the sleep apnea product recall and changes in financial
assumptions. Our model includes a more than EUR 1 billion cash charge for potential legal settlements
derived from this issue. We are trimming our medium- and long-term sales growth and margin
assumptions, which leads us to reduce our fair value estimate to EUR 25 per share from EUR 33, as
Philips' 2025 original sales and margin ambitions seem unreachable to us at this point. Management
indicated that weakness will spill over to 2023, given the macroeconomic environment, but did not
quantify any impact.
We expect adjusted EBITA margins to stay at 7%-9% in 2022 and 2023, with a 12% margin in 2026
(compared with our previous 13% forecast and management’s original target in the high teens). We
expect a downward revision of these targets once Roy Jakobs becomes CEO. Although the appointment
of Jakobs brings fresh air, we believe it will take time for markets to restore credibility to Philips. Several
profit warnings and industry peers (Siemens Healthineers) performing much better than Philips in the
same environment have caused a real credibility issue for Philips, in our view. Jakobs indicated
improving execution will be his first priority once he takes the reins.
Headwinds Still Hurt Philips in Q2, and We Take Guidance With a Grain of Salt; Reducing FVE Javier
Correonero, Equity Analyst, 25 Jul 2022
Narrow-moat Philips' second-quarter results were weak. The company had already highlighted expected
supply chain constraints and inflationary issues three months ago, but the hit was harder than
expected. Sales declined 7% organically, with China the main detractor from performance, as prolonged
lockdowns made sales and order intake decline 30% year over year. Some Philips factories in China had
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to suspend production for two months because of component shortages. Management reduced its 2022
outlook to 1%-3% organic sales growth and around a 10% adjusted EBITA margin. Our forecasts already
assumed 2.2% organic sales growth in 2022 (more conservative than management’s previous guidance
of 3%-5%) and an EBITA margin below 10%. Management also moderated its midterm guidance, which
it set in November 2020, from 5%-6% annual sales growth to 4%-6% until 2025.
We have several times highlighted that Philips’ long-term guidance was too optimistic, and our
forecasts have long remained below management's targets. We have low confidence in management's
guidance as Philips' financial outlook has been modified many times since 2018 due to supply chain,
regulatory, and other setbacks. We had already trimmed our fair value estimate to EUR 35 per share
from EUR 39 three months ago. Now we are further trimming it to EUR 33 from EUR 35 after reducing
our midterm margin assumptions, given continuous setbacks and low confidence in financial targets set
by management.
By division, trends were mixed. In diagnostics and treatment (negative organic growth of 4% overall),
imaging and ultrasound were the laggards due to component shortages, while image guided therapy
grew by midsingle digits. Connected care is still impacted by the Respironics product recall (negative
13% growth). In personal health, double-digit growth in North America was not enough to compensate
for declines in China and Russia, so overall sales declined 5%. K
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Competitors Price vs. Fair Value
General Electric Co GE
Fair Value: 118.00

8 Aug 2023 21:45, UTC
200
Last Close: 115.49
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.54 0.95 0.97 0.72 0.69 0.98 Price/Fair Value
-54.50 50.07 -2.87 9.71 -10.97 55.66 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 8 Aug 2023 21:45, UTC.
Siemens AG SIE
Fair Value: 166.00

13 Sep 2023 14:35, UTC
200
Last Close: 138.10
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.76 0.96 1.00 1.17 0.89 0.83 Price/Fair Value
-12.97 23.58 5.66 32.11 -13.16 8.94 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 13 Sep 2023 14:35, UTC.
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Siemens Healthineers AG Registered Shares SHL
Last Close: 46.33

200 Fair Value: —
—
150 Over Valued

Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
— — — — — — Price/Fair Value
— 18.75 1.11 58.11 -27.61 0.02 Total Return %
Morningstar Rating
No data available
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of —.
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Morningstar Historical Summary

Financials as of 30 Jun 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (EUR Bil) 22 21 17 17 18 18 17 17 17 18 9 18
Revenue Growth % -1.1 -2.7 -21.4 3.7 2.1 1.9 -5.4 1.0 -0.9 3.9 6.7 6.8
EBITDA (EUR Mil) 3,102 1,787 1,754 2,353 2,646 2,795 2,809 2,855 1,996 115 230 -210
EBITDA Margin % 14.1 8.4 10.4 13.5 14.9 15.4 16.4 16.5 11.6 0.7 2.7 -1.1
Operating Income (EUR Mil) 1,883 489 658 1,466 1,421 1,655 1,391 1,404 623 -177 -362 -369
Operating Margin % 8.6 2.3 3.9 8.4 8.0 9.1 8.1 8.1 3.6 -1.0 -4.2 -2.0
Net Income (EUR Mil) 1,169 415 624 1,448 1,657 1,090 1,167 1,187 3,319 -1,608 -593 -2,028
Net Margin % 5.3 1.9 3.7 8.3 9.3 6.0 6.8 6.9 19.4 -9.0 -6.9 -11.0
Diluted Shares Outstanding (Mil) 983 983 984 990 1,007 997 972 958 950 921 921 963
Diluted Earnings Per Share (EUR) 1.19 0.42 0.64 1.46 1.64 1.09 1.20 1.23 3.49 -1.74 -0.64 -2.12
Dividends Per Share (EUR) 0.70 0.75 0.75 0.75 0.75 0.75 0.80 0.00 0.81 0.81 0.00 0.00
Valuation as of 31 Aug 2023

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales 1.0 1.0 0.9 1.1 1.2 1.6 2.1 2.0 1.7 0.7 1.1 1.1
Price/Earnings 37.5 32.4 37.6 71.4 24.3 34.4 29.9 35.1 28.2 -9.0 -8.8 -9.7
Price/Cash Flow 17.4 14.3 21.0 15.0 14.0 16.9 20.4 17.1 10.8 27.9 -111.1 28.7
Dividend Yield % 2.81 3.31 3.34 2.76 2.54 2.59 1.95 — 2.59 6.07 — —
Price/Book 2.3 2.0 1.9 2.3 2.6 2.4 3.3 3.6 2.4 0.8 1.4 1.6
EV/EBITDA 8.7 13.7 15.1 13.0 12.6 11.3 15.3 15.6 17.7 166.4 0.0 0.0
Operating Performance / Profitability as of 30 Jun 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % 4.2 1.5 2.1 4.6 5.8 4.3 4.4 4.3 11.3 -5.2 -2.0 -6.5
ROE % 10.5 3.8 5.5 12.0 13.5 9.0 9.5 9.7 25.2 -11.6 -4.7 -15.1
ROIC % 9.1 4.5 5.5 9.3 10.6 7.7 7.8 7.4 17.9 -6.8 -2.5 -8.1
Asset Turnover 0.8 0.8 0.6 0.6 0.6 0.7 0.6 0.6 0.6 0.6 0.3 0.6
Financial Leverage
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % 22.8 25.5 26.0 24.3 22.4 21.1 27.9 32.0 28.4 34.6 37.2 —
Equity/Assets % 42.2 38.3 37.6 38.9 47.4 46.5 46.6 42.8 46.6 43.2 41.1 —
Total Debt/EBITDA 1.3 2.3 3.3 2.4 1.5 1.4 1.9 2.1 3.0 63.8 35.7 —
EBITDA/Interest Expense 7.8 4.3 3.9 6.9 10.8 13.8 12.9 15.7 12.2 0.5 1.3 -0.7
Morningstar Analyst Historical/Forecast Summary as of 12 Oct 2022

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 12-31-2021 2021 2022 2023 2024 2025
Price/Sales 1.5 0.7 1.1 1.1 1.0
Revenue (EUR Mil) 19,535 17,156 16,881 17,422 18,629 Price/Earnings 26.2 7.4 44.7 23.1 16.4
Revenue Growth % 0.3 -12.2 -1.6 3.2 6.9 Price/Cash Flow 15.5 14.3 26.5 16.5 14.8
EBITDA (EUR Mil) 3,381 2,195 1,976 2,472 2,946 Dividend Yield % 0.0 1.8 0.9 1.6 2.3
EBITDA Margin % 17.3 12.8 11.7 14.2 15.8 Price/Book 3.2 1.9 1.3 1.2 1.2
EV/EBITDA 10.5 8.7 13.0 10.4 8.7
Operating Income (EUR Mil) 1,860 871 659 1,113 1,493
Operating Margin % 9.5 5.1 3.9 6.4 8.0
Net Income (EUR Mil) 1,462 3,710 388 719 1,001
Net Margin % 7.5 21.6 2.3 4.1 5.4
Diluted Shares Outstanding (Mil) 913 870 853 830 817
Diluted Earnings Per Share(EUR) 1.60 4.26 0.45 0.87 1.23
Dividends Per Share(EUR) 0.00 0.56 0.18 0.33 0.47
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ESG Risk Rating Breakdown
Exposure Subject Subindustry (45.0) u Exposure represents a company’s vulnerability to ESG

Company Exposure1 48.9 risks driven by their business model
48.9
u Exposure is assessed at the Subindustry level and then
– Manageable Risk 44.7 Medium
2 0 55+ specified at the company level
Unmanageable Risk 4.2
Low Medium High u Scoring ranges from 0-55+ with categories of low, me-
dium, and high-risk exposure
Management
u Management measures a company’s ability to manage
Manageable Risk 44.7 ESG risks through its commitments and actions
58.5%
– Managed Risk3 26.1 Strong
u Management assesses a company's efficiency on ESG
Management Gap4 18.6 100 0 programs, practices, and policies

Strong Average Weak u Management score ranges from 0-100% showing how
Overall Unmanaged Risk 22.7 much manageable risk a company is managing
ESG Risk Rating ESG Risk Rating Assessment5

22.73
Medium
Negligible Low Medium High Severe ESG Risk Rating is of Sep 06, 2023. Highest Controversy Level is as of Sep 08,
2023. Sustainalytics Subindustry: Medical Devices. Sustainalytics provides
ESG Risk Ratings measure the degree to which a company’s value is impacted by environmental, social, and governance Morningstar with company ESG ratings and metrics on a monthly basis and
risks, by evaluating the company’s ability to manage the ESG risks it faces. as such, the ratings in Morningstar may not necessarily reflect current
Sustainalytics’ scores for the company. For the most up to date rating and
1. A company's Exposure to material ESG issues 2. Unmanageable Risk refers to risks that are inherent to a particular business model that cannot be managed by more information, please visit: sustainalytics.com/esg-ratings/.
programs or initiatives 3. Managed Risk = Manageable Risk multiplied by a Management score of 58.5% 4. Management Gap assesses risks that are not
managed, but are considered manageable 5. ESG Risk Rating Assessment = Overall Unmanaged Risk = Management Gap plus Unmanageable Risk
Peer Analysis 06 Sep 2023 Peers are selected from the company's Sustainalytics-defined Subindustry and are displayed based on the closest market cap values
Company Name Exposure Management ESG Risk Rating
Koninklijke Philips NV 48.9 | Medium 0 55+ 58.5 | Strong 100 0 22.7 | Medium 0 40+
General Electric Co 67.7 | High 0 55+ 44.2 | Average 100 0 40.6 | Severe 0 40+
Siemens AG 60.8 | High 0 55+ 58.6 | Strong 100 0 28.5 | Medium 0 40+
Signify NV 41.3 | Medium 0 55+ 70.8 | Strong 100 0 13.3 | Low 0 40+
Siemens Healthineers AG 43.2 | Medium 0 55+ 59.8 | Strong 100 0 19.3 | Low 0 40+
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Appendix
Historical Morningstar Rating
Koninklijke Philips NV PHIA 16 Sep 2023 00:10, UTC
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
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General Electric Co GE 15 Sep 2023 21:18, UTC
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Siemens AG SIE 15 Sep 2023 23:53, UTC
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Overview turns on invested capital (or ROIC) over and above our es- rive our annual free cash flow forecast.
At the heart of our valuation system is a detailed projec- timate of a firm’s cost of capital, or weighted average
Stage II: Fade
tion of a company’s future cash flows, resulting from our cost of capital (or WACC). Without a moat, profits are
The second stage of our model is the period it will take
analysts’ research. Analysts create custom industry and more susceptible to competition. We have identified five
the company’s return on new invested capital—the re-
company assumptions to feed income statement, balance sources of economic moats: intangible assets, switching
turn on capital of the next dollar invested (“RONIC”)—to
sheet, and capital investment assumptions into our glob- costs, network effect, cost advantage, and efficient scale.
decline (or rise) to its cost of capital. During the Stage II
ally standardized, proprietary discounted cash flow, or
Companies with a narrow moat are those we believe are period, we use a formula to approximate cash flows in
DCF, modeling templates. We use scenario analysis, inde-
more likely than not to achieve normalized excess returns lieu of explicitly modeling the income statement, balance
pth competitive advantage analysis, and a variety of other
for at least the next 10 years. Wide-moat companies are sheet, and cash flow statement as we do in Stage I. The
analytical tools to augment this process. Moreover, we
those in which we have very high confidence that excess length of the second stage depends on the strength of
think analyzing valuation through discounted cash flows
returns will remain for 10 years, with excess returns more the company’s economic moat. We forecast this period to
presents a better lens for viewing cyclical companies,
likely than not to remain for at least 20 years. The longer last anywhere from one year (for companies with no eco-
high-growth firms, businesses with finite lives (e.g.,
a firm generates economic profits, the higher its intrinsic nomic moat) to 10–15 years or more (for wide-moat com-
mines), or companies expected to generate negative
value. We believe low-quality, no-moat companies will panies). During this period, cash flows are forecast using
earnings over the next few years. That said, we don’t dis-
see their normalized returns gravitate toward the firm’s four assumptions: an average growth rate for EBI over the
miss multiples altogether but rather use them as support-
cost of capital more quickly than companies with moats. period, a normalized investment rate, average return on
ing cross-checks for our DCF-based fair value estimates.
new invested capital (RONIC), and the number of years
We also acknowledge that DCF models offer their own
When considering a company's moat, we also assess until perpetuity, when excess returns cease. The invest-
challenges (including a potential proliferation of estim-
whether there is a substantial threat of value destruction, ment rate and return on new invested capital decline un-
ated inputs and the possibility that the method may miss
stemming from risks related to ESG, industry disruption, til a perpetuity value is calculated. In the case of firms
shortterm market-price movements), but we believe these
financial health, or other idiosyncratic issues. In this con- that do not earn their cost of capital, we assume marginal
negatives are mitigated by deep analysis and our
text, a risk is considered potentially value destructive if its ROICs rise to the firm’s cost of capital (usually attribut-
longterm approach.
occurrence would eliminate a firm’s economic profit on a able to less reinvestment), and we may truncate the
cumulative or midcycle basis. If we deem the probability second stage.
Morningstar’s equity research group (”we,” “our”) be-
lieves that a company’s intrinsic worth results from the of occurrence sufficiently high, we would not characterize
the company as possessing an economic moat. Stage III: Perpetuity
future cash flows it can generate. The Morningstar Rating
Once a company’s marginal ROIC hits its cost of capital,
for stocks identifies stocks trading at a discount or premi-
2. Estimated Fair Value we calculate a continuing value, using a standard per-
um to their intrinsic worth—or fair value estimate, in
Combining our analysts’ financial forecasts with the petuity formula. At perpetuity, we assume that any
Morningstar terminology. Five-star stocks sell for the
firm’s economic moat helps us assess how long returns growth or decline or investment in the business neither
biggest risk adjusted discount to their fair values, where-
on invested capital are likely to exceed the firm’s cost of creates nor destroys value and that any new investment
as 1-star stocks trade at premiums to their intrinsic worth.
capital. Returns of firms with a wide economic moat rat- provides a return in line with estimated WACC.
Four key components drive the Morningstar rating: (1) our ing are assumed to fade to the perpetuity period over a
longer period of time than the returns of narrow-moat Because a dollar earned today is worth more than a dollar
assessment of the firm’s economic moat, (2) our estimate
firms, and both will fade slower than no-moat firms, in- earned tomorrow, we discount our projections of cash
of the stock’s fair value, (3) our uncertainty around that
creasing our estimate of their intrinsic value. flows in stages I, II, and III to arrive at a total present
fair value estimate and (4) the current market price. This
value of expected future cash flows. Because we are
process ultimately culminates in our singlepoint star rat-
Our model is divided into three distinct stages: modeling free cash flow to the firm—representing cash
ing.
available to provide a return to all capital providers—we
discount future cash flows using the WACC, which is a
1. Economic Moat Stage I: Explicit Forecast
weighted average of the costs of equity, debt, and pre-
The concept of an economic moat plays a vital role not In this stage, which can last five to 10 years, analysts
ferred stock (and any other funding sources), using ex-
only in our qualitative assessment of a firm’s long-term make full financial statement forecasts, including items
pected future proportionate long-term, market-value
investment potential, but also in the actual calculation of such as revenue, profit margins, tax rates, changes in
weights.
our fair value estimates. An economic moat is a structural workingcapital accounts, and capital spending. Based on
feature that allows a firm to sustain excess profits over a these projections, we calculate earnings before interest,
3. Uncertainty Around That Fair Value Estimate
long period of time. We define economic profits as re- after taxes (EBI) and the net new investment (NNI) to de-
Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company’s intrinsic
Morningstar Equity Research Star Rating Methodology
value. This rating is used to assign the margin of safety
required before investing, which in turn explicitly drives
our stock star rating system. The Uncertainty Rating is
aimed at identifying the confidence we should have in as-
signing a fair value estimate for a given stock.
Our Uncertainty Rating is meant to take into account any-

thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
ß
thing that can affect our ability to accurately predict Morningstar Equity Research Star Rating Methodology
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we’d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain
we are about the potential dispersion of outcomes, the
greater the discount we require relative to our estimate of
the value of the firm before we would recommend the
purchase of the shares. In addition, the Uncertainty Rat-
ing provides guidance in portfolio construction based on
risk tolerance. Once we determine the fair value estimate of a stock, we justed return is highly likely over a multiyear time frame.
compare it with the stock’s current market price on a Scenario analysis developed by our analysts indicates
Our Uncertainty Ratings are: Low, Medium, High, Very daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
High, and Extreme. lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
which the stock is listed is open. Our analysts keep close ing upside potential.
Margin of Safety
tabs on the companies they follow, and, based on thor-
Qualitative Analysis
QRating ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Uncertainty Ratings QQQQQRating
estimates as warranted. justed return is likely.
Low 20% Discount 25% Premium
Medium 30% Discount 35% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
High 40% Discount 55% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
Very High 50% Discount 75% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Extreme 75% Discount 300% Premium
serve as a gauge of the broader market’s valuation. When
there are many 5-star stocks, the stock market as a whole QQ We believe investors are likely to receive a less than
Our uncertainty rating is based on the interquartile range, fair risk-adjusted return.
is more undervalued, in our opinion, than when very few
or the middle 50% of potential outcomes, covering the
companies garner our highest rating.
25th percentile–75th percentile. This means that when a Q Indicates a high probability of undesirable risk-adjus-
stock hits 5 stars, we expect there is a 75% chance that ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
the intrinsic value of that stock lies above the current time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
market price. Similarly, when a stock hits 1 star, we ex- our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
pect there is a 75% chance that the intrinsic value of that cessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
stock lies below the current market price. leaving the investor exposed to Capital loss.
prices may adjust).
4. Market Price Our star ratings are guideposts to a broad audience and Other Definitions
The market prices used in this analysis and noted in the individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
report come from exchange on which the stock is listed goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
which we believe is a reliable source. needs, and complete investment portfolio, among other
factors. Capital Allocation Rating: Our Capital Allocation (or
For more details about our methodology, please go to Stewardship) Rating represents our assessment of the
https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be- quality of management’s capital allocation, with particu-
low: lar emphasis on the firm’s balance sheet, investments,
Morningstar Star Rating for Stocks QQQQQ We believe appreciation beyond a fair risk ad- and shareholder distributions. Analysts consider compan-
ß
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing mendations made herein may not be suitable for all in-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- vestors: recipients must exercise their own independent
Corporate governance factors are only considered if they aged ESG Risk score is below 50. judgment as to the suitability of such investments and re-
are likely to materially impact shareholder value, though commendations in the light of their own investment ob-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are jectives, experience, taxation status and financial posi-
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low, tion.
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute,
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar- The information, data, analyses and opinions presented
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus- herein are not warranted to be accurate, correct, com-
Standard rating is most common as most managers will tries covered. plete or timely. Unless otherwise provided in a separate
exhibit neither exceptionally strong nor poor capital alloc- agreement, neither Morningstar, Inc. or the Equity Re-
ation. The ESG Risk Rating Assessment is a visual representa- search Group represents that the report contents meet all
tion of Sustainalytics ESG Risk Categories on a 1 to 5 of the presentation and/or disclosure standards applic-
Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low able in the jurisdiction the recipient is located.
or to Dec. 9, 2020, was determined using a different pro- Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes,
cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit Except as otherwise required by law or provided for in a
dividend and share buyback policies, analysts also con- sustainalytics.com/esg-ratings/ separate agreement, the analyst, Morningstar, Inc. and
sidered execution, compensation, related party transac- the Equity Research Group and their officers, directors
tions, and accounting practices in the rating. Ratings should not be used as the sole basis in evaluating and employees shall not be responsible or liable for any
a company or security. Ratings involve unknown risks and trading decisions, damages or other losses resulting from,
Capital Allocation Rating: Our Capital Allocation (or uncertainties which may cause our expectations not to or related to, the information, data, analyses or opinions
Stewardship) Rating represents our assessment of the occur or to differ significantly from what was expected within the report. The Equity Research Group encourages
quality of management’s capital allocation, with particu- and should not be considered an offer or solicitation to recipients recipients of this report to read all relevant is-
lar emphasis on the firm’s balance sheet, investments, buy or sell a security. sue documents (e.g., prospectus) pertaining to the secur-
and shareholder distributions. Analysts consider compan- ity concerned, including without limitation, information
ies’ investment strategy and valuation, balance sheet Risk Warning relevant to its investment objectives, risks, and costs be-
management, and dividend and share buyback policies. Please note that investments in securities are subject to fore making an in vestment decision and when deemed
Corporate governance factors are only considered if they market and other risks and there is no assurance or guar- necessary, to seek the advice of a legal, tax, and/or ac-
are likely to materially impact shareholder value, though antee that the intended investment objectives will be counting professional.
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Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:15, UTC | Reporting Currency: EUR | Trading Currency: EUR

| Exchange: EURONEXT - EURONEXT AMSTERDAM Page 1 of 22

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Price vs. Fair Value

Fair Value: 25.00

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Bears Say Javier Correonero, Equity Analyst, 12 Oct 2022

declines for Philips' imaging business.

reputational damage to Philips and benefited its main competitor, ResMed.

Economic Moat Javier Correonero, Equity Analyst, 12 Oct 2022

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Fair Value Fair Value Fair Value

Economic Moat Narrow Narrow Wide —

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Risk and Uncertainty Javier Correonero, Equity Analyst, 12 Oct 2022

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Capital Allocation Javier Correonero, Equity Analyst, 25 Jul 2022

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Analyst Notes Archive

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

up 100 basis points year over year.

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Competitors Price vs. Fair Value

Fair Value: 118.00

Fair Value: 166.00

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Siemens Healthineers AG Registered Shares SHL

Last Close: 46.33

150 Over Valued

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

Morningstar Historical Summary

Valuation as of 31 Aug 2023

Morningstar Analyst Historical/Forecast Summary as of 12 Oct 2022

Koninklijke Philips NV PHIA QQQQ 16 Sep 2023 00:10, UTC

ESG Risk Rating Breakdown

Exposure Subject Subindustry (45.0) u Exposure represents a company’s vulnerability to ESG

dium, and high-risk exposure

Management Gap4 18.6 100 0 programs, practices, and policies

Overall Unmanaged Risk 22.7 much manageable risk a company is managing

ESG Risk Rating ESG Risk Rating Assessment5

General Electric Co GE 15 Sep 2023 21:18, UTC

Siemens AG SIE 15 Sep 2023 23:53, UTC

Research Methodology for Valuing Companies

Our Uncertainty Rating is meant to take into account any-

Research Methodology for Valuing Companies

Our recommended margin of safety—the discount to fair

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

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