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Stock Analyst Update

Increased Tech Emphasis Helps Philips Shine

Semiconductors and DVD players propel growth, but shares are pricey.

Dutch conglomerate Philips Electronics (PHG) is having a blowout year, but that has made it awfully pricey for such an economically sensitive company.

Philips reported outstanding second-quarter results Tuesday, continuing the strong performance that has driven up its stock 60% this year. Sales grew 25%, propelled by better-than-expected growth in the consumer-electronics and semiconductor divisions. Operating income, excluding gains from the sale of assets, was up 155% compared with a year ago, and Philips' operating margin improved to 8%.

The company has boosted its formerly sluggish growth by putting more emphasis on high-tech, high-growth areas of its business. Its semiconductor division, which primarily makes chips for electronic and digital consumer devices, grew 60% in the first half of this year and was the company's most profitable division, with a 20% operating margin. Strong growth in the consumer-products division came mainly from DVD players and broadband-cable set-top boxes, two extremely hot areas of the market.

The downside to Philips' excellent results and improved outlook is that its shares are now rather expensive. Its price/earnings ratio is nearly 40, compared with less than 10 just three years ago, and its price/sales ratio has risen similarly. A P/E of 40 may not sound very high in this market, but it's pricey when you consider that Philips' revenue comes mostly from cyclical businesses that would be hit hard in an economic slowdown. This is a very solid company, but investors wanting a piece of it will have to pay the piper.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.