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Stock Analyst Update

Semiconductors Propel Philips to Solid Growth

But chip prices are a question mark going forward.

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What Happened?
Dutch electronics maker Philips Electronics (PHG) continued its string of excellent results Tuesday when it announced that third-quarter earnings, excluding one-time gains, more than doubled to $0.49 per share. The biggest driver of growth was Philips' semiconductor division, which grew more than 50% and improved its margins; the component and medical division also turned in strong performances. Although sales in Philips' consumer electronics division were flat overall, some parts of that division, particularly DVD players, showed rapid growth.

What It Means for Investors 
While these results are certainly nothing to sneeze at, Philips is becoming increasingly vulnerable to the volatility of the semiconductor industry, which makes caution warranted, in our opinion. The problems of chip giant Intel (INTC) only indirectly affect Philips, which makes chips primarily for wireless phones and other communication devices. But Motorola's (MOT) recent warning of weakening wireless phone sales have spooked investors who fear that such weakness will reach Philips' European market.

We think Philips deserves a lot of credit for boosting profitability and jump-starting its formerly mediocre growth by focusing on high-tech, high-growth areas of its business. While its performance this year has been impressive, its reliance on the semiconductor division to drive growth adds another twist of volatility to an already economically sensitive company. Thus, we believe that while there's a lot to like in Philips for long-term investors, short-term players are wise to exercise caution with this stock.

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