We have recently upgraded Philips' moat to wide, reflecting its status as a leader in imaging and image-guided therapies. The company's track record has been inconsistent, with several self-inflicted setbacks damaging its reputation and investor confidence. However, we believe that resolving the sleep care issues, concentrating on its high-performing segments, and the introduction of a new management team can help shift the narrative. Our valuation indicates a discount compared to larger competitors on a multiple basis, which we find justified due to their stronger competitive positions and Philips' broader range of potential outcomes. The company has significant work ahead to regain investor trust, but even with a higher margin of safety, we view the shares as undervalued at current levels. A focus on profitability is crucial. The company's operating margins have been severely impacted by the sleep care challenges, along with significant component sourcing issues and margin compression in imaging. Currently, Philips significantly trails its imaging peers in profitability, but we anticipate that the company will begin to narrow this gap, though it may not close entirely.
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