GE HealthCare Stock Has Had a Great Start. More Gains Lie Ahead.
Call it a win-win.
GE HealthCare Technologies GEHC –1.85% (ticker: GEHC) was spun out of General Electric GE –0.61% (GE) after a tough 2022, a year marred by supply-chain problems and inflation. Investors, though, like what they’ve seen from the company so far in 2023, the inaugural year for the newly independent company. The stock has gained 26% since becoming a stand-alone publicly traded company on Jan. 4, outperforming the S&P 500 indexSPX –1.45% ’s 1.7% rise over the same span.
Now, GE HealthCare needs to deliver. Investors want to see progress on products and profit margins, enough at least to quell fears and expand valuation multiples, while the company works to prove that it can compete with the likes of Bayer BAYN –0.55% (BAYN.Germany) and Siemens Healthineers SHL –1.06% (SHL.Germany). GE HealthCare should be able to deliver, and investors willing to make the leap now—before seeing how things turn out—could well be rewarded.
“Despite the attractive setup, GE HealthCare shares are still trading at a…discount,” writes Mizuho Securities analyst Anthony Petrone. He expects that to close “with continued execution this year.”
Chicago-based GE HealthCare is new, but it isn’t small. It ended 2022 with roughly 50,000 workers and generated sales of $18.3 billion. The company is a leader in medical imaging—there are millions of GE MRIs and CT, PET, and ultrasound scanners in use around the globe—as well as patient-care solutions and pharmaceutical diagnostics. About half of GE HealthCare sales come from recurring parts and services.
Revenue growth in imaging is driven by investment in new products that improve health outcomes. GE HealthCare’s recently introduced products include a hand-held ultrasound unit that looks like something from Star Trek, and deep-learning software that improves diagnostic accuracy and lets doctors conduct more scans with the same equipment by upgrading old scanners without hospitals having to make new, multimillion-dollar purchases.
These advances, however, don’t come cheap: The company spent about $1 billion on research and development in 2022, and plans to spend 6% to 7% of sales on R&D in coming years. Still, GE HealthCare earned an operating profit of $2.9 billion in 2022 and is expected to report $3 billion and $3.2 billion in operating profit in 2023 and 2024, respectively.
Responsible for maintaining the balance between research and profitability is Peter Arduini, who became CEO of GE HealthCare at the start of 2022. He had worked at GE for 15 years before leaving for medical-device maker Baxter International (BAX). In 2012, he took the helm at Integra LifeSciences Holdings (IART), running that company until 2021, a period that saw the stock gain 16.6% a year on average, outperforming the S&P 500 by half a percentage point a year.
Then, GE CEO Larry Culp came calling, offering Arduini a chance to run a larger healthcare franchise. In the months leading up to the spinoff, he focused on getting the right people into the right jobs. “We’ve actually upgraded a significant amount of product management and commercial leaders,” Arduini says, adding that it has been easier to recruit people now that HealthCare is separate from GE.
While GE HealthCare stock has gotten off to a solid start, Wall Street has so far been little help to investors. Just four analysts cover the company, according to Bloomberg, and just two have price targets. Mizuho’s Petrone, who launched coverage of GE HealthCare on Feb. 17, is perhaps the most high-profile analyst to follow the stock. In his initiation, Petrone noted that he had surveyed 25 high-volume radiology sites across the U.S. and found significant pent-up demand for scans and procedures coming out of Covid, perhaps even better than the company expects. He rates the stock a Buy with a $90 price target, up 18% from Thursday’s close of $76.38.
With a dearth of research to rely on, looking at a comparable company can be helpful in valuing GE HealthCare and thinking about where its stock might be headed. Rival Siemens Healthineers, which became a publicly traded company in 2018 after raising money in an initial public offering, might provide the best comparison. On the surface, that comparison looks unfavorable. GE’s sales were flat over the past four years, while Siemens’ revenue has grown by 60%. GE HealthCare’s operating profit margins, meanwhile, have fallen below 15% from almost 20%, while Siemens’ profit margins are off by just one percentage point.
The difference has more to do with changes in the business mix than the way the companies are run. Siemens bought Varian Medical Systems in 2021, adding more than $3 billion in annual sales, the year after GE HealthCare sold its biopharma business to Danaher (DHR), as Culp sought to reduce GE’s corporate debt load. Accounting for all of the M&A activity, GE HealthCare’s sales grew at 7% last year, compared with Healthineers’ 6% sales growth.
Those differences shouldn’t cause a huge difference in valuations, yet GE HealthCare stock trades for about 12.8 times estimated earnings before interest, taxes, depreciation, and amortization, while Siemens Healthineers’ stock trades at 16.6 times Ebitda. Closing those gaps would also put GE HealthCare at about $90, up almost 20%.
And that’s just a start. GE HealthCare expects to grow sales at a mid-single-digit annual percentage rate while expanding profit margins to almost 20%. That growth and profit equation could yield earnings per share of more than $6 by mid-decade. If GE HealthCare stock trades in line with the market at that point, shares would be about $110 apiece—a 20% annualized gain.
Sometimes, it’s good to go it alone.