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Friday, 24 June 2011

Royal Philips NV: Does a new CEO in his rookie year always generate losses and dropping stockprices for Philips?

Philips (PHG) is a multinational company in lighting, healthcare and consumer electronics from The Netherlands, that you can best compare with a phoenix: every time you think the company is finished, it reinvents itself and returns from its ashes to grow bigger and stronger again.
This week was again a memorable week for the company (see chart): after an already miserable year-to-date with the stock dropping from its peak rate $34.08 on January 18th to $25.04 on June 15th, the stock dropped on June 22 to $22.60 from $26.05 after a serious profit warning, only to meander the rest of the week between $23 and $23.60.

(Philips stock rates Year-to-Date:
Click to enlarge
To understand the dynamics behind this company, you have to know about its history:

The in Eindhoven, The Netherlands based company Philips started in the 19th century as a factory in lightbulbs. It turned in a number of years into a behemoth with – in its heyday – 350,000 employees (1970), that produced everything electrical and electronical: from washing machines to X-ray machines, electric shavers and halogen lightbulbs. Philips NatLab (physics laboratory) has been one of the best research centers in the world, with countless inventions and products of fundamental research.Also it has been the parent company of famous startups, like ASML (wafer machines for the chips industry), and NXP (microprocessors), both state-of-the-art companies.
Besides that, it owned an extremely succesful record label (Polygram), a cable television company  (UPC), a number of retail chains in Europe and the US and participations and joint-ventures in almost every important electronics brand in Europe and The Far East. And it was the inventor of the compact cassette, the CD and the DVD.
Till so far the good news on this truly multinational company.
The bad news is that the company is an investor’s worst nightmare. Cor Boonstra, CEO of the company from 1996-2001 called the organization structure in 1996: “a plate of spaghetti”. And that was after Operation Centurion, the worldwide reorganization of Philips, started by previous CEO Jan Timmer, had ‘finished’.  And also after the discharge of ten thousands of ‘redundant’ employees and some drastic changes in the organization structure.
The problem was that the company was so big, versatile and sluggish, operated in so many countries and had an organization that was so complex, that it could be compared with a super tanker where the captain is frantically turning the steering rudder: nothing happens… Trying to change the company seems like pulling on a dead horse. If you look over the last 40 years, the numbers of reorganizations, strategic reorientations and buy-outs of company parts is truly countless. And for a few exceptions, nothing seems to have the desired effect.
But just when you think there is no strategy left, the product lines are hopeless, there is no subsidiary left to sell and the company has finally sung its swansong, other parts of the company become successful again and grow enormously, thus saving the company from bankruptcy.
It is a disaster for the long-term investor to invest in this extremely market-sensitive, incomprehensable and opaque company.
However, there is one rule-of-thumb that you can follow, if you look at the long-term stats: the new CEO-effect.
In the last full working year of a Philips CEO, the company almost always shows good profits and a high stock price. In the first year of the new CEO the company often reports (record) losses and the stock price drops (see chart).
(The CEO-effect _Philips stock rates 20Y:
Click to enlarge

Of course there is no guarantee that this is a winning strategy. Especially after the crash of the dotcom bubble and in 2008, the stock got hammered. But it seems more than a coindicental pattern, that the last full year of the old CEO of Philips is always successful if you look at the stock price, while the next year is a year with reported losses and falling stock prices.
So from that point-of-view, this week’s profit warning and stock price drops didn’t come as a real surprise.

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