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Philips Agrees to Acquire TomTec, Continues Buyout Spree

Dutch technology behemoth, Koninklijke Philips N.V. PHG, recently announced an agreement to buy image-analysis software provider, TomTec Imaging Systems GmbH. Last month, the healthcare technology provider had announced the acquisition of two companies – CardioProlific and Spectranetics Corporation SPNC. All the three buyouts are likely to be conducive to Philips’ image-guided therapy portfolio.

Philips boasts a large global installed base of customers and has earned a solid reputation among clients providing anatomical intelligence, ultra-mobile and portable ultrasound solutions.

The company has been striving to fortify its foothold in the cardiac ultrasound market. The latest buyout will likely prove to be a significant step toward achieving this goal. Financial details of the deal have been kept under wraps.

The Deal in Details

The acquisition is also expected to help Philips expand to other clinical areas, including obstetrics and gynecology. Germany-based TomTec specializes in diagnostic ultrasound that helps healthcare personnel to increase efficiency and diagnostic quality. Post this buyout, over 100 employees of TomTech will become part of Philips’ Ultrasound Business Group.

Apart from helping to commercialize Philips-branded products, TomTec will continue its vendor-neutral product line and integrate these medical software applications into third-party systems. Philips’ ultrasound image quality, 3D-imaging and transducer technology portfolios are expected to benefit the most from TomTec’s clinical applications, workflow solutions, and research and development (R&D) capabilities.

Acquisitions to Stoke Healthcare Unit

Over the past two years, Philips has successfully morphed into a healthcare technology provider. To expand its presence in the domain, the company is increasingly turning to bolt-on acquisitions. The TomTec buyout marks the company’s seventh acquisition in the calendar year. Shares of the company have returned 21.4% in the last six months, outperforming the Zacks categorized Electronic-Miscellaneous Products industry’s average gain of 15.1%.

Philips’ revenues have been encouraging in recent times, and these accretive buyouts should lend solid momentum to the unit’s growth in the quarter to come. Also, the company’s transformation from a hardware-oriented to a software-driven business, which is a higher-margin, recurring-revenue model, sits well with the investors.

Connected Care Business Slowdown Plays a Spoilsport

Despite these positives, the macroeconomic sluggishness is having a negative impact on the company’s growth drive. Some time back, President and CEO, Frans van Houten had expressed discontent about the pace of adoption of connected-care products. This is particularly alarming, considering the premium health-service provider has concertedly streamlined its massive business empire to focus mainly on healthcare.

The present structure of insurance institutions, which focuses on reimbursing critical care, and not prevention of incidents, has played a major spoilsport in thwarting investments. Though Houten remains bullish about the long-term growth drivers, weakness in the connected-care businesses continues to pose as a major overhang for Philips, at least in the short run.

In addition, the consensus analyst community is not favoring the stock as the Zacks Consensus Estimate for full-year 2017 earnings has gone down from $1.57 cents to $1.55, due to one downward estimate revisions versus zero upward.

Key Picks

Some better-ranked stocks in the broader sector include Applied Materials, Inc. AMAT and Applied Optoelectronics, Inc. AAOI. While Applied Materials sports a Zacks Rank #1 (Strong Buy), Applied Materials holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Optoelectronics has a whopping average earnings surprise of 118.3% for the trailing four quarters, beating estimates all through.

With four back-to-back beats, Applied Materials has an average positive surprise of 3.4% for the trailing four quarters.

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