2023-06-29 07:30:00 ET
Summary
- GE HealthCare Technologies, a spin-off from General Electric, is performing well with a market cap of around $35 billion and strong tailwinds in the healthcare industry.
- The company operates in four business segments: Imaging, Ultrasound, Patient Care Solutions, and Pharmaceutical Diagnostics.
- The company's Q1 performance showed impressive revenue growth, improved margins, and a robust backlog, indicating future growth potential.
- Although the current dividend yield is low, the company's projected free cash flow suggests the potential for increased dividends and debt reduction.
- With an EV/EBITDA multiple of 12x and a consensus price target of $92, GEHC presents an enticing investment opportunity.
Introduction
It's time to talk about GE HealthCare Technologies ( GEHC ) , the first spin-off from its conglomerate parent General Electric ( GE ).
There are three reasons why I'm covering this company.
- Just recently, I discussed General Electric and its plans to become a pure-play aviation company in early 2024.
- I am a fan of healthcare investments. Equipment supplier Danaher ( DHR ) is a big part of my portfolio, and various other stocks like Abbott Laboratories ( ABT ) are part of my watchlist.
- Hence, even if I do not end up investing in the new GEHC company, comments regarding the health of its industry are important.
The good news is that GEHC is doing extremely well. While its dividend yield is low and its year-to-date performance is 32%, there is room for upside.
So, without further ado, let's dive into the details!
GEHC & Its Many Tailwinds
Earlier this year, GEHC started to trade independently from GE. It currently has a market cap of roughly $35 billion. It's one of two spin-offs that are expected to bring new glory to the company behind the GE ticker.
Wall Street Journal
One thing important to mention is that healthcare has never been an issue. It wasn't spun off to get rid of waste. On the contrary, both healthcare and aerospace are seen as GE's crown jewels. The issue is the Power segment.
According to the Wall Street Journal in January:
Based on his forecasts for 2024 earnings, Mr. Davis estimates that GE Aerospace could fetch an enterprise value of $94 billion, while GE HealthCare would be valued at around $48 billion and GE Vernova at less than $13 billion.
“ Even if healthcare doesn’t trade well, it will be fine. It is a solid business and known brand ,” Mr. Davis said. “Aerospace has obvious value and it will attract investor interest,” he said, “but GE power has very limited interest .”
Before I continue to comment on favorable trends, let's quickly take a step back and assess what GEHC is about. After all, healthcare is a very complex sector.
The company serves customers in more than 160 countries using four business segments:
GE HealthCare Technologies
- Imaging
This segment covers a wide range of clinical specialties and provides tools for screening, diagnosis, therapeutic decision-making, and patient monitoring. The portfolio includes Molecular Imaging, Computed Tomography, Magnetic Resonance, Image-Guided Therapies, Women's Health, and X-ray.
- Ultrasound
This segment has a focus on designing specialty-specific solutions for various clinical areas, including Radiology and Primary Care, Women's Health, Cardiovascular, Point of Care and Handheld, and Surgical Visualization & Guidance.
- Patient Care Solutions ("PCS")
This business segment provides medical devices, consumable products, services, and digital solutions that complement clinical expertise. PCS products address challenges such as patient demand, labor shortages, and rising costs of care.
- Pharmaceutical Diagnostics ("PDx").
This segment includes molecular imaging and incorporates collaborations with pharmaceutical companies.
With regard to the aforementioned comments in the Wall Street Journal, the company benefits from a number of secular healthcare trends. Below, I'm using a screenshot from the company's 10-K . These tailwinds apply to a number of other companies as well.
GE HealthCare Technologies
These trends are expected to generate strong longer-term tailwinds for GEHC.
- Imaging business segment : Growing at a mid-single-digit CAGR, driven by the demand for high image quality, leveraging AI capabilities, and advanced interventional surgical systems.
- Ultrasound business segment : Growing at a mid-single-digit CAGR, fueled by increased use of ultrasound in diagnostics, therapy, and monitoring across various care settings.
- Patient Care Solutions business segment : Growing at a mid-single-digit CAGR, as there is a demand for integrated solutions that facilitate better decision-making and improve workflow efficiencies.
- Pharmaceutical Diagnostics business segment : Growing at a mid-single-digit CAGR, driven by the demand for improved visualization to enable more precise diagnoses and therapy selection for patients.
Based on these developments, let's look into recent developments.
A Closer Look At Recent Events & Expectations
In light of strong long-term tailwinds, it's good to report that GEHC started this year off with a bang. In the first quarter, GEHC reported revenues of $4.7 billion, an 8% increase year-over-year and 12% organic growth.
Adjusted EBIT margin improved to 14.1% on a stand-alone basis, driven by higher volume, pricing, and productivity initiatives. Adjusted EPS was $0.85, a 35% increase year-over-year.
GE HealthCare Technologies
Here's an overview of the performance per segment. Note that all of them performed well with both pricing and volume tailwinds.
- Imaging : Strong organic revenue growth of 12% year-over-year, driven by MR and molecular imaging. Margins declined but are expected to improve sequentially throughout the year.
- Ultrasound : Strong organic revenue growth of 10% year-over-year, led by cardiovascular and general imaging products. Margins increased slightly, with benefits from productivity and price initiatives.
- Patient Care Solutions : Revenue increased by 11% organically, driven by backlog fulfillment and the launch of key products. Margin improved significantly, driven by productivity, price, and volume, but is expected to normalize throughout the year.
- Pharmaceutical Diagnostics : Strong organic revenue growth of 19% year-over-year, driven by price, increased procedures, and improved supply. Margin declined but showed sequential improvement.
Moreover, the company ended the quarter with a book-to-bill ratio of 1.01. This ratio shows the relationship between new orders and finished products. A ratio above 1 indicates that new orders are coming in faster than the company can turn into finished products. That's indicative of higher future growth.
The total backlog is currently $19 billion.
GE HealthCare Technologies
GEHC also commented on strong pricing, which it expects to maintain.
For example, pricing contributed to a 2% to 3% accretion in 2023, while the remainder resulted from volume and uplift. The company aims to sustain price accretion at 1% to 2% in the outer years. However, the focus extends beyond pricing, with an emphasis on providing value to customers and expanding gross margins through initiatives like business continuity planning and platforming.
Furthermore, GEHC continues to invest organically for long-term growth, with a 13% increase in R&D expenditure in the first quarter. They have also made acquisitions, including Caption Health and IMACTIS , to gain access to new technologies, markets, and clinical capabilities.
In light of these developments, GEHC reaffirmed its full-year 2023 guidance.
- The company expects organic revenue growth in the range of 5% to 7%.
- Adjusted EBIT margins are projected to be in the range of 15% to 15.5%, with an increase in the second half.
- Adjusted EPS is expected to grow by 7% to 11% compared to 2022.
- The free cash flow conversion is expected to be 85% or more.
GE HealthCare Technologies
With regard to the free cash flow conversion, the company is expected (by analysts, this is not guidance) to generate more than $2.2 billion in free cash flow in 2025, which would translate to a 6.4% free cash flow yield. These numbers are based on roughly $500 million in annual CapEx to sustain and grow the business.
Leo Nelissen
This opens the door to debt reduction and dividends.
According to the company:
Strong cash flow generation will allow us to pay down debt and invest organically and inorganically in our business. We are pleased to initiate a dividend with opportunity for growth over time. Our dividend philosophy is driven by prudent capital planning as well as a strong revenue and earnings growth potential and a robust free cash flow profile. Our balance sheet remains strong with significant financial flexibility.
The company's balance sheet comments are spot on, as it has a 1.1x net leverage ratio using 2024 expectations. Net debt is expected to be reduced from $6.8 billion in 2022 to less than $2.3 billion in 2025. The company has a BBB credit rating, which I expect to be pushed to BBB+ over the next two years.
With regard to its dividend, the company has a $0.03 per share per quarter payout. This translates to a yield of just 0.2%.
Needless to say, this yield is extremely low. However, I am sure it will rapidly rise to reflect the company's free cash flow potential. If the company maintains a >6% free cash flow yield, I have little doubt that the stock will yield close to 3% over the next five years. Net debt will be almost eliminated at the end of 2025 (based on the current trajectory), which opens up the possibility of distributing a big chunk of free cash flow to shareholders.
Please note that these are my expectations. It obviously depends on the company and how it wants to spend its money. That said, I doubt the company will prefer buybacks over dividends - at least not while its dividend yield is so low.
Valuation
With that said, GEHC stock is currently trading at 12x NTM EBITDA. In 2024, EBITDA is expected to rise by 5.6%, followed by a 10.5% surge in 2025. While these numbers are obviously prone to adjustments, I believe that secular growth expectations are fair.
The current consensus price target is $92, which implies 19% more upside.
I think that's a fair assessment, even after a 45% stock price surge from its 52-week low.
However, the stock is currently consolidating. I think prices close to $70 offer attractive buying opportunities.
FINVIZ (Automated Technical Analysis)
The only reason why I will not be investing in GEHC is my position in Danaher and my plans to buy Abbott, which I like as well. I am not yet looking to get into large healthcare equipment.
This is a personal choice. It doesn't mean that I disagree with my own assessment in this article.
Takeaway
In summary, GE HealthCare Technologies has emerged as a promising spin-off from General Electric, driven by strong tailwinds in the healthcare industry.
With a solid market cap of around $35 billion, GEHC is thriving in its four business segments: Imaging, Ultrasound, Patient Care Solutions, and Pharmaceutical Diagnostics.
The company's Q1 performance showed impressive revenue growth, improved margins, and a robust backlog, indicating future growth potential. GEHC's focus on pricing, customer value, and R&D investments bodes well for sustained success.
Although the current dividend yield is low, the company's projected free cash flow suggests the potential for increased dividends and debt reduction.
Trading at 12x NTM EBITDA, with a consensus price target of $92, GEHC presents an enticing investment opportunity.
As an investor with interests in other healthcare companies, I recognize GEHC's potential but have chosen to explore alternative options, at least for the time being.
For further details see:
GE HealthCare: A Good Future Dividend Growth Stock?