LONDON  - Drugs work better when they are free from impurities. The same seems to be true with healthcare-technology companies. Koninklijke Philips , which is worth 37 billion euros, and 36-billion-euro Siemens Healthineers, both hope to make money from an ageing population by selling medical gear like MRI scanners to hospitals. But the former offers a cleaner growth story than its German rival.

Philips Chief Executive Frans van Houten has all but eliminated the yawning valuation discount to Siemens Healthineers which existed at the beginning of 2019. At the start of the year, the Dutch company’s enterprise value was 12 times expected 2019 earnings before interest, taxes and amortization (EBITA). That was 26% below the comparable multiple for Siemens Healthineers. The discount has since been narrowing, and better-than-expected results on Monday, which pushed Philips shares up 4%, mean both companies are now valued at about 16 times forward EBITA.

Accelerating growth and cost cuts have helped push up Philips’ valuation. Van Houten said on Monday that second-quarter sales rose 6% from a year earlier after excluding currency swings and M&A, above analysts’ consensus expectation of a 4.5% increase. And the company has proved fairly resilient to U.S.-China trade tensions even though tariffs should push up the cost of raw materials like aluminium and steel. Van Houten says Philips’ revenue is growing at a double-digit rate in China. Meanwhile retail customers seemed to have liked the company’s new power toothbrush and electric shavers.

By contrast, Siemens Healthineers has been bogged down by its new Atellica product for blood tests. In May the company said its target of shipping 2,200-2,500 of them in a year was “very challenging” and its shares are down 1% so far this year.

Investing in Philips now seems like the more sensible way to bet on rising demand for health equipment as populations age. A one-third increase in its share price this year means investors already have high hopes. Monday’s results suggest van Houten can probably meet them.

CONTEXT NEWS

- Koninklijke Philips on July 22 said its revenue in the three months to the end of June was 4.7 billion euros, 6% higher than a year earlier excluding the effects of currency fluctuations, acquisitions and disposals.

- Analysts expected 4.6 billion euros of revenue, or growth of 4.5% according to company-compiled consensus estimates.

- The Dutch medical-technology group’s adjusted earnings before interest, taxes and amortisation were 549 million euros, slightly above analysts’ expectations.

- Philips’ shares were up 3.7% to 40.39 euros at 0825 GMT on July 22.

(Editing by Swaha Pattanaik and Karen Kwok)

© Reuters News 2019