Summary
Philips's shares have been hammered on the broad recall of DreamStation 1 sleep apnea machines due to a risk of sound abatement foam breaking down, dislodging, and potentially being inhaled.
Very little useful information is available now, including the rate of injury, the severity of those injuries, and even whether lab tests can confirm that the foam can cause injuries.
The sleep business generates about $1.3B in annual revenue, with high-teens margins, and a total loss here would wipe out about $4B of equity value.
I believe it takes some rather extreme estimates/assumptions to get to $6B in potential injury/liability claims, suggesting that the $10.5B decline in equity value is too extreme.
Philips is going to be in the doghouse for some time, and management's efforts to rebuild credibility have been damaged, but the shares do look undervalued here.
“Buy the dips” may be good advice, but it’s often tough to follow because meaningful pullbacks don’t usually happen without a reason, and that proximate cause is often scary in the short term. Such is the case with Philips (PHG) and its recall (and future litigation) of the DreamStation 1 sleep apnea machine. While there are billions in potential liability costs in play, it looks as though the market has overreacted to what should prove to be a manageable situation for the company.
Given that the market reaction would already seem to factor in a more-than-worst case scenario, this is a name for investors to...
Read Full Story: https://seekingalpha.com/article/4454478-philips-dreamstation-nightmare-could-be-longer-term-opportunity
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