Oct. 15 (Bloomberg) -- Royal Philips Electronics NV, Europe's largest maker of consumer electronics, fell the most in more than four years in Amsterdam trading after profit dropped and the company cut its sales forecast for the medical division.

Philips shares lost as much as 6.3 percent, the most since May 2003. Third-quarter net income declined to 331 million euros ($469 million) from 4.24 billion euros a year earlier, missing analysts' estimates. Sales growth at the medical unit will be about 4 percent in 2007, missing a 6 percent target, Chief Financial Officer Pierre-Jean Sivignon said on a call today.

Chief Executive Officer Gerard Kleisterlee sold most of the company's semiconductor assets and reduced the stake in a flat- panel display venture to focus on medical scanners, appliances and lighting. Philips said the medical division, the world's largest maker of patient monitoring systems, is suffering because of reduced government spending in the U.S.

``If this has to be your growth engine, it's some sort of a problem that it's not doing well,'' said Corne van Zeijl, who oversees about $1.48 billion including Philips shares at SNS Asset Management in the Dutch town of Den Bosch. ``Investors could be somewhat disappointed in the medical division.''

Philips shares fell 1.82 euros, or 5.7 percent, to 30.33 euros in Amsterdam. They are up 6.2 percent this year, compared with a 12 percent increase of the Amsterdam Exchanges Index.

Profit fell to 30 cents a share from 3.57 euros a year earlier. Profit in the quarter was seen at 387 million euros, the median estimate in a Bloomberg survey of 11 analysts via phone and e-mail. Sales in the period rose 3.3 percent to 6.52 billion euros, topping the 6.36 billion-euro median estimate.

Medical Challenge

Sales at the medical systems unit, which accounts for about a quarter of the group total, rose 1.6 percent to 1.6 billion euros in the period. The division's earnings before interest, tax and amortization fell to 182 million euros, equivalent to 11.4 percent of sales, from 192 million euros, missing estimates.

The U.S. Budget Deficit Reduction Act has hurt the medical division's Imaging Systems unit, as reduced reimbursement for imaging procedures outside hospitals led to fewer equipment orders from clinics, said Jayson Otke, a Philips spokesman.

The U.S. last year made up half of the medical unit's 6.74 billion euros in revenue.

The revenue growth forecast for the medical business excludes the effects of acquisitions, disposals and currency swings. The unit will be ``up to one point short'' of its Ebita margin target of as much as 15 percent this year, Sivignon said.

`Somewhat Disappointing'

``Medical is somewhat disappointing, but it's good to see that this is more than offset by the other divisions,'' said Victor Bareno, an Amsterdam-based analyst at SNS Securities who has an ``accumulate'' rating on the stock.

Revenue at the consumer electronics division, which makes televisions and DVD players and is Philips's largest unit, rose 4.7 percent to 2.52 billion euros in the period. The unit's Ebita rose 33 percent to 36 million euros, or 1.4 percent of sales.

Domestic appliances sales gained 24 percent to 718 million euros, with Ebita jumping 41 percent to 135 million euros. That gave the division an Ebita margin of 18.8 percent.

Chip Gain

Philips had a 4.19 billion-euro gain from the sale of a majority stake in its chip division last year.

Total income from continuing operations, which excludes gains and losses from disposals, rose to 333 million euros in the third quarter from 1 million euros a year earlier, Philips said.

Ebita rose to 438 million euros from 71 million euros. The year-earlier number included a 265 million-euro one-time cost to reflect a change in accounting for asbestos-related product liabilities. Ebita as a percentage of sales reached 6.7 percent in the quarter from 1.1 percent a year earlier.

On Sept. 10, Philips raised its profit forecast because of lower costs linked to the planned merger of its health-care units and of the consumer divisions. Earnings before interest, tax and amortization will top 10 percent of sales by 2010, up from more than 7.5 percent this year, and operating earnings per share will more than double.

``Nothing in the results changes my neutral view,'' said Scott Geels, an analyst at Sanford C. Bernstein who has a ``market perform'' rating on the stock. ``At this point domestic appliances is doing well, and medical is clearly not. The different growth profiles of the various divisions will get them there,'' he said, referring to the 2010 targets.

CFO Sivignon declined to say what the company's sales growth will be this year, adding it targets annual average sales growth of as much as 6 percent. The company will exceed an operating profit margin of 7.5 percent this year, he said.

Chip Exit

Kleisterlee sold control of the semiconductor unit and most of its shares in Hsinchu, Taiwan-based Taiwan Semiconductor Manufacturing Co., the world's largest customized-chip maker. The Dutch company still owns 19.9 percent of NXP BV, Europe's third- largest semiconductor maker, after it sold control of the unit to a group of buyout firms last year.

Philips, also Europe's largest maker of televisions, cut its stake in LG.Philips LCD Co. to 19.9 percent from 32.9 percent on Oct. 10. Philips has a ``long-term plan to go down to zero or something close to that,'' Sivignon said, adding the company may ``keep a few percentage points.''

LG.Philips, the world's second-largest maker of liquid crystal displays, reported its biggest profit in more than three years on Oct. 9. The venture contributed 127 million euros to Philips's net income in the third quarter, compared with a shortfall of 85 million euros a year earlier.

Kleisterlee, 61, has said asset sales and a plan to increase debt will leave as much as 20 billion euros of cash for medical and lighting takeovers, dividends and share buybacks over the next three years. Philips has this year unveiled or completed at least eight acquisitions.

New Structure

As of Jan. 1, the company will have three main businesses, consumer lifestyle, health care and lighting, all the result of combinations of smaller units. The revamp will save Philips as much as 200 million euros annually.

Philips has already started repurchasing 4 billion euros of shares. It had about 800 million euros left for buybacks on July 26, based on documents on its Web site. The company said today it will unveil ``the next step'' in its program ``to return capital to shareholders'' when it reports fourth-quarter earnings.

Credit-default swaps based on 10 million euros of Philips debt rose as much as 12 percent to 22,333 euros today, according to data compiled by Bloomberg. Credit-default swaps are used to speculate on a company's ability to repay debt. A rise indicates worsening perceptions of credit quality.

To contact the reporter on this story: Marcel van de Hoef in Amsterdam at mvandehoef@bloomberg.net

Last Updated: October 15, 2007 12:11 EDT