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Investing.com -- UBS Global Research in a note dated Thursday upgraded its rating on Koninklijke Philips (AS:PHG) N.V. to "buy" from "neutral," citing improvements in the company’s financial and operational standing.
The brokerage also raised its price target for Philips shares to €29, up from the previous €26.50, implying more than 20% upside potential.
The decision comes as UBS analysts highlight the removal of key overhangs that had weighed on Philips’ valuation in recent years.
The company has made progress in resolving issues stemming from the recall of its respiratory devices, settling major personal injury litigation, and implementing cost-saving measures to improve margins.
As a result, UBS sees Philips in a stronger position to match sector-wide revenue growth at a compound annual rate of 5% between 2025 and 2029, with earnings per share expected to grow at a faster rate.
Despite these improvements, Philips shares currently trade at just 15 times UBS’s estimated 2025 earnings, making it one of the cheapest stocks in the European MedTech sector.
UBS analysts argue that this valuation discount is unjustified, particularly given the company’s restructuring efforts and its improved profitability outlook.
The brokerage estimates that Philips’ price-to-earnings multiple for 2025 remains about 10% lower than its historical average relative to the sector and its imaging peers.
UBS also notes that Philips’ 2025 guidance appears conservative, particularly in relation to its China business. The bank’s projections assume a steep decline in China Personal Health sales in the first half of the year, followed by a flat performance in the second half.
Similarly, the Diagnosis & Treatment business in China is expected to decline by around 10% for the full year. Even with these cautious estimates, UBS sees Philips reaching the upper end of management’s guidance.
The analysts also points to recent data suggesting potential upside, with Chinese government tender activity showing signs of recovery, which could lead to a better-than-expected performance in the latter half of the year.
Beyond the near-term outlook, UBS views Philips as a more investable stock following its extensive restructuring and leadership changes.
The note emphasizes that most of the headwinds that have plagued the company since 2021, including regulatory challenges and financial strain from legal settlements, have largely been addressed.
With a new management team in place, Philips is well-positioned to execute its mid-term strategy and explore potential portfolio adjustments, including the possibility of re-entering the U.S. sleep therapy market.
One of the key factors supporting UBS’s upgrade is Philips’ relative insulation from competitive risks in China compared to its industry peers.
While global medical technology firms such as Siemens (ETR:SIEGn) Healthineers and GE Healthcare face growing competition from Chinese manufacturers, Philips is deemed the least exposed among the major imaging players.
According to UBS estimates, 30% of Philips’ revenues are at risk from Chinese market dynamics, compared to 40% for Siemens Healthineers and nearly 50% for GE Healthcare.
The company’s focus on high-margin, innovation-driven segments such as cardiac ultrasound and advanced imaging technologies further strengthens its competitive position.
UBS has also slightly raised its EPS forecasts for Philips by 2-3% from 2025 onward, reflecting improved foreign exchange conditions and cost-saving initiatives.
The brokerage’s price target revision to €29 is based on an updated discounted cash flow analysis, with a higher terminal margin assumption, supported by Philips’ ongoing margin expansion efforts.
The revised valuation implies that Philips would trade at 18 times its estimated 2025 earnings, still at a 15% discount to Siemens Healthineers but more in line with historical pre-recall levels.
Given the combination of improved earnings visibility, reduced litigation risks, and an undemanding valuation, UBS sees a strong case for investors to take a fresh look at Philips shares.