Stocktoberfest: A healthcare stock with multiple tailwinds

For Livewire's Stocktoberfest, we nominate healthcare stock, Philips. Being parsimonious Scots, we appreciate ‘value for money’ and like it when demand growth for our stocks is supported by this consideration too. We’ve been investing in healthcare cost-cutters for a while, and see Philips as a great example.

The brand is very strong and I stress-tested the product myself via buying their Healthwatch, scales and blood pressure monitor (which are all connected to the Healthsuite Smartphone App) in a belated attempt to address my own middle-aged spread!

Demographic tailwinds

We’re all familiar with how populations are getting older, heavier and more prone to chronic disease (often living with it for many years). This places huge stress on healthcare budgets around the world.

Companies that can keep patients out of hospital as much as possible and get them out as quickly as possible when they do have to go in are key to keeping these costs under control.

At the time we bought it, Philips was still treated by the index providers as a European Industrial. With half of the sell-side coverage written by analysts scarred by the company’s profit-destroying investments in semiconductors, TVs and CDs.

Fundamental tailwinds

We see two ways for Philips to drive better than expected revenue and profit growth;

  1. Restructuring – they have a great brand and some great innovative technology but the manufacturing footprint has been spread too wide in the past and margins lag peers considerably as a result. Management is tackling this aggressively and we expect self-help to expand margins for the next five years.
  2. Innovation – Philips continues to invest almost €2b every year in developing new technologies (think new imaging devices, sensors, and software apps). These products enable new healthcare delivery models and are only now beginning to turn into new revenue streams for Philips. 

What are we most excited about?

People want to take more responsibility for their own health and make their own choices on how they interact with their healthcare providers. There is lots of evidence that better patient engagement means better compliance with treatment plans, and better compliance means better outcomes.

I know from personal experience the motivating power of a watch telling you that once again you have done another day of less than 30 ‘active minutes’. Smartphones, sensor technology, the Cloud and ‘Big Data’ have provided the means for this transformation. All we need now is for healthcare systems around the world to deliver the ways.

That’s where Philips comes in. Their products enable patients to be safely monitored in their own homes and to consult remotely with their doctors, if need be, via video-conference. Philips own data shows that their Population Health Management solution (telehealth, medication management, patient population data analysis, etc.) saved one US health system 27% on their cost of care and reduced hospitalisations by 45%. Imagine those savings across a whole country like the US.

If you do have to go into hospital, their integrated imaging equipment and software makes it more likely that your doctor will diagnose you correctly and quickly – getting you back home as soon as possible, with minimal exposure to hospital food!

Oh, and me losing some weight would be pretty exciting too…

 

We 'Prost' Stocktoberfest with...

We’re supporting local brewers, BrewDog. Their ‘Restorative Beverage for Invalids & Convalescents’ sounds just the tonic. At 8.7% alcohol content, it should provide a quick, cost-effective night out too. Of course, you should always drink responsibly!

 

Further insights 

If you would like to read more from Greig and the global equity team at NIkko AM, please visit our website 

 

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Drink responsibly.


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Greig Bryson
Portfolio Manager
Nikko AM

Greig joined Nikko AM in August 2014 and is a Portfolio Manager in the Global Equity team. Before joining Nikko AM, he was an Investment Director at SWIP, responsible for the management of European and UK mandates

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