GE HealthCare Reports Steady 1Q23 Results; Maintain ‘Buy’ Rating

On April 25, 2023, GE HealthCare Technologies Inc. (NASDAQ

NDAQ
: GEHC, $81.52, Market Capitalization $37.1 billion), a leading global medical technology, pharmaceutical diagnostics, and digital solutions innovator, reported 1Q23 results with a beat on both revenue and EPS versus consensus. 1Q23 Revenues of $4.7 billion increased 8.4% YoY (12.0% YoY organically), driven by growth across all segments, led by Pharmaceutical Diagnostics (PDx) recurring sales. Adjusted EBIT was $664 million versus $599 million in the prior-year period, with an Adjusted EBIT margin of 14.1%, up 30 bps YoY. The increase was primarily driven by an increase in volume, partially off set by changes in product mix. The inflation and planned investments affected the company; however, these were counteracted by measures to raise prices and improve productivity. Adjusted EPS for 1Q23 was $0.85 per share, down by 11.5% YoY, which was affected due to incremental interest expense. The company reaffirmed its FY23 guidance and continues to expect organic revenue growth in the range of 5% to 7% YoY, Adjusted EBIT margin in the range of 15.0% to 15.5%, Adjusted EPS in the range of $3.60 to $3.75, and capital expenditures in the range of $350 million to $400 million.

Moreover, GEHC declared its first cash dividend of $0.03 per share for 1Q23. The dividend will be payable on June 15, 2023, to the shareholders of record as of May 23.

Valuation and Recommendation

The company provides essential healthcare technologies to developed and emerging markets. It has expertise in medical imaging, digital solutions, patient monitoring and diagnostics, drug discovery, and performance improvement solutions, which are precision health’s building blocks. Our fair value estimate for GE HealthCare stands at $94.00 (Previously: 81.00) per share based on a 2023e EV/EBITDA multiple of 14.8x (~8% discount to its closest peer, Siemens Healthineers’s multiple of 16.0x). We maintain our ‘Buy’ rating with an implied upside of 15.3% from the current price of $81.52 as of 4/27. Risks to our target price fare increased costs of production materials due to continued inflation pressures, lower volumes, and a decline in sales compared to the company’s larger peers. Despite the company reporting steady 1Q23 results, the stock fell ~9.2% on 4/25. It should be noted that GEHC has rallied 34.8% since RW trading, and the decline could be more of profit booking and slight disappointment that the company did not raise the guidance in spite of steady 1Q results. We believe the current price level may provide an attractive entry point for long-term investors.

Other Updates

• Received FDA clearance for CARESCAPE canvas patient monitoring platform.

• Announced a multi-year agreement to expand access to healthcare technology management services with Advantus Health Partners.

• Acquired Caption Health, expanding Ultrasound to support new users.

• Received FDA 510(k) clearance for Embo ASSIST AI software.

• Expanded contrast media portfolio with MRI agent Pixxoscan (gadobutrol) launch.

FY23 Outlook

The company reaffirmed its guidance for FY23 as follows:

• Organic revenue growth in the range of 5% to 7% year-over-year.

• Adjusted EBIT margin in the range of 15.0% to 15.5%, reflecting an expansion of 50 to 100 basis points versus 2022 Standalone Adjusted EBIT margin of 14.5%.

• Adjusted effective tax rate (ETR) in 23% to 25%.

• Adjusted EPS in the range of $3.60 to $3.75, representing 7% to 11% growth. This compares to the 2022 Standalone Adjusted EPS of $3.38.

• Free cash flow conversion of 85% or more for the full year. The company’s cash flow outlook assumes that the legislation requiring R&D capitalization for tax purposes is repealed or deferred beyond 2023.

• Capital expenditures are expected to be in the range of $350 million to $400 million.

1Q23

Revenues of $4.7 billion increased 8.4% YoY, driven by growth across all segments, led by Pharmaceutical Diagnostics (PDx) recurring sales, while foreign exchange negatively impacted growth by 4.0%. Total company book-to-bill was 1.01x in 1Q23, owing to solid revenue growth across all segments, led by recurring sales of Pharmaceutical Diagnostics (PDx). Operating income increased by 9.8% YoY to $559 million, and the operating margin improved by 20 bps to 11.9% compared to the prior-year period. Adjusted EBIT was $664 million, up 10.9% YoY, and the Adjusted EBIT margin increased 30 bps at 14.1% versus 13.8% in 1Q22. The growth was primarily driven by increased volume, partially off set by changes in the product mix. The inflation and planned investments affected the company; however, these were counteracted by measures to raise prices and improve productivity. Net income was $372 million, down 4.4% YoY compared to $389 million in the prior-year period due to higher interest expenses. Earnings per share (EPS) from continuing operations was $0.41, down 52.3% YoY, compared to $0.86 in the prior year due to a non controlling interest redemption of preferred stock. Adjusted EPS was $0.85, down 11.5% YoY compared to $0.96 in the prior year due to incremental interest expense. Cash flow from operating activities was $468 million, and Free cash flow was $325 million, down $46 million year-over-year, due to incremental post-retirement benefit payments and interest and increased capital expenditures.

1Q23

Revenues of $2.5 billion in 1Q23 increased 8.0% YoY compared to $2.3 billion in 1Q22. Revenue growth was driven by Molecular Imaging and Computed Tomography, Magnetic Resonance, and surgery. Segment EBIT was $191 million, down 7.3% YoY, compared to $206 million in 1Q22. The segment EBIT margin was 7.7%, down 130 bps versus 8.9% for the prior year period, pressured by continued inflation, mix, and investment, partially off set by volume and price.

1Q23

1Q23 Revenues of $859 million increased 5.4% YoY compared to $815 million in 1Q22. Revenue growth was led by Radiology and Primary Care, Women’s Health, Cardiovascular, and handheld Ultrasound. Segment EBIT was $207 million, up by 7.8% YoY compared to $192 million for the prior year period. The segment EBIT margin was 24.1%, up 50 bps compared to 23.6% in 1Q22, due to increased productivity, price, and volume growth, partially off set by inflation and planned investments, including the Caption Health acquisition.

1Q23

Revenues of $781 million increased 9.1% YoY compared to $716 million in 1Q22. The impact of supply chain resiliency and price actions drove revenue improvement. Segment EBIT was $109 million, up by 67.7% YoY, compared to $65 million in the prior year period. The segment EBIT margin was 14.0%, up by 490 bps compared to 9.1% in 1Q22, improved through price, volume, and lower costs, partially off set by inflation.

1Q23

Revenues of $558 million increased 15.3% YoY compared to $484 million in 1Q22 due to higher price and volume. Segment EBIT of $155 million was up by 12.3% YoY compared to $138 million in the prior-year period. The segment EBIT margin was 27.8%, down by 70 bps, compared to 28.5% for the prior year period, impacted by lower volumes and inflationary pressures on production materials.

Valuation

GE HealthCare:

The company provides essential healthcare technologies to developed and emerging markets. It has expertise in medical imaging, digital solutions, patient monitoring and diagnostics, drug discovery, and performance improvement solutions, which are precision health’s building blocks. Products and services are sold worldwide, primarily to hospitals and medical facilities. For FY23, the company expects organic revenue growth in the range of 5% to 7% year-over-year, Adjusted EBIT margin in the range of 15.0% to 15.5%, and Adjusted EPS in the range of $3.60 to $3.75.

EV/EBITDA Valuation: Our fair value estimate for GE HealthCare stands at $94.00 (Previously: 81.00) per share based on a 2023e EV/EBITDA multiple of 14.8x (~8% discount to its closest peer, Siemens Healthineers’s multiple of 16.0x). Our FY23 adjusted EBITDA stands at $3.65 billion, in line with the FY23 outlook provided by the company. We have considered a net debt of $6.3 billion for the valuation of GE HealthCare. We have considered other adjustments/additional costs of $5 billion to arrive at an implied equity value of $42.8 billion for GEHC. We expect GEHC to outperform as a separate entity in the market and generate long term shareholder value, driven by the launch of next-generation diagnostic equipment, the expansion of drug indications, and the greater adoption of Edison, GE HealthCare’s intelligence platform.

Company Description

GE HealthCare Technologies Inc.

GE HealthCare is a leading global medical technology, pharmaceutical diagnostics, and digital solutions innovator dedicated to providing integrated solutions, services, and data analytics to make hospitals more efficient, clinicians more effective, therapies more precise, and patients healthier and happier. Products and services are sold worldwide, primarily to hospitals and medical facilities. GEHC is organized into four business segments: Imaging, Ultrasound, Patient Care Solutions and Pharmaceutical diagnostics. The Imaging portfolio consists of medical imaging solutions, including CT, MR, molecular imaging, X-ray, women’s health, image guided therapies, enterprise imaging software, service capabilities, and digital solutions. The ultrasound segment comprises consoles and probes, handheld devices, intraoperative imaging systems, visualization software, service capabilities, and digital solutions; Patient Care Solutions encompass monitoring, anesthesia and respiratory care, maternal infant care, and diagnostic cardiology solutions, as well as consumables, service capabilities, and digital solutions. Pharmaceutical Diagnostics consists of imaging agents that include contrast media and radiopharmaceuticals that enhance diagnostic images. The company recorded sales of $18.3 billion in FY22.