One of the more interesting parts of being an asset manager is that every day Mr. Market comes to visit you. He knocks on your door and he always has many stories to tell about the companies he wants to sell to you. Mr. Market is in a good mood when stock prices are high and in a bad mood when stock prices are low. When we have cash to invest, we prefer speaking with Mr. Market when he is in a bad mood.
Of course, the current outbreak of Corona virus has put Mr. Market in a bad mood. We can understand that, we also do not like the situation. Our mandate from our clients, with whom we invest alongside with, is however to detect mispriced quality companies and build a portfolio of those. The ongoing market turmoil has as always led to indiscriminate selling in a “sell-first-think-second” style. That is when we roll up our sleeves and intensify our search for companies or profit from previously made research.
Philips is a quality company we had the chance to invest in as the share price fell from 45 to 38 EUR in just a few weeks. Philips has in recent years transformed itself into a pure-play health care technology company. In the past, Philips was a conglomerate also active in traditional consumer electronics and lightning. Today, Philips is a global leader in patient diagnostic imaging, monitoring and home care as well as consumer lifestyle products for personal care. Above all, it’s a much more focused company doing what they do best instead of trying to do it all.
We see a bright future for Philips. The growing and aging global population requires more and better patient diagnostics. There is a rising burden of chronic diseases and high pressure on the resources in the global health care system. That makes it necessary to shift from a volume-based approach towards a value-based approach in order for the health care system to become more efficient and stand up to the demographic challenge they will face in the coming many, many years.
We think Philips is well in position to help solving some of those challenges. The company has a good spot in the value chain as they help the entire health care system to become better at planning, diagnosing, treating and monitoring a growing populations of patients. We also believe that for as long the company stays innovative their customers (think doctors, nurses, health care professionals) will be sticky. This is an industry that rarely change supplier of mission-critical tools.
We expect annual double digit-returns from Philips in the years ahead. The current earnings alone covers a good part of that and we expect the business to continue to grow slowly and margins to improve by a range of self-help measures. This should expand the earnings power meaningfully over the next few years. If that happens, we are locked in for some good profits on an investment we can also sleep well on.