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GE Healthcare’s (GEHC) disappointing earnings offer a lesson and an opportunity

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3 weeks ago

May 1, 2024

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GE Healthcare shares sank Tuesday after the company’s first-quarter sales and profits fell slightly short of the Wall Street consensus. The shortfall is disappointing, but the stock’s steep sell-off is an overreaction and creates an opportunity for investors. Total revenue dipped 1% year over year to $4.65 billion, missing analysts’ expectations of $4.8 billion, according to estimates compiled by LSEG. Adjusted earnings per share of $0.90 missed the LSEG estimate by 1 cent. GE Healthcare Why we own it : GE Healthcare is the global leader in medical imaging, diagnostics, and digital solutions in health care. Its split from General Electric in 2023 enabled the now-standalone company to invest more aggressively in R & D, leading to new product innovations, especially in artificial intelligence. The combination of new, higher-priced products along with the optimization of its business post-split creates an underappreciated margin expansion story. The rollout of new Alzheimer’s disease therapies is another longer-term tailwind. Competitors : Philips and Siemens Most recent trade : Nov. 1, 2023 Initiated : May, 17, 2023 Bottom Line Frustrating. That’s what we have to say about this GE Healthcare quarter. After battling the stock in the $60s and low $70s per share for much of 2023, we thought we were finally out of the woods in February after the company delivered better-than-expected fourth-quarter results and provided a 2024 outlook above expectations. However, that upbeat guidance came with the caveat that growth would be weighted in the second half of the year as the company lapped difficult comparisons in China in the first two quarters. It’s always harder for a company to show growth when it’s facing these so-called tough comps, which essentially means expansion was unusually higher the year before. The blowouts look bigger when the year-ago results were weak — that’s why a common bullish narrative for any stock is that it’s facing “easy comps.” GEHC YTD mountain GE Healthcare YTD With the benefit of hindsight, we should have trimmed our GE Healthcare position when the stock rallied into the high $80s and low $90s per share ahead of this period of tough comps. We held off, betting that management was practicing UPOD — under promise, over deliver — and would outperform expectations in China like it did all of last year. The quarter unfortunately didn’t go our way. But after listening to the conference call, we didn’t the sense that business was about to fall off a cliff, much like Tuesday’s nearly 14% decline in the stock suggests. GE Healthcare leadership was pretty optimistic about trends improving through the year. In fact, the company reiterated guidance. Some added pressure to execute after this double miss should help in the quarters ahead, too. The stock should be down Tuesday, but the size of the sell-off looks unwarranted considering there were no changes to management’s outlook. That’s why we are upgrading our rating to a buy-equivalent 1 from 2 and maintaining our $92 price target. We would be buyers of this decline if we were not restricted from trading. Quarterly commentary Total company orders increased by 1%, a slowdown from the 3% growth reported in the fourth quarter. This was likely lighter than what the market expected, but we take some comfort in the fact it remained in positive territory. Investors tend to focus on orders because they’re indicative of customer demand, which management believes remains positive from improving hospital fundamentals and demand growth in procedures. Another measure of future demand is the backlog, which exited the first quarter at $18.7 billion. That’s down $400 million from the end of 2023, but still at healthy levels. The company’s book-to-bill ratio, which is a measure of orders received relative to sales, was 1.03. That’s down a few ticks from 1.05 in the fourth quarter, but it represents an improvement from 1.01 in the first quarter of 2023. Anything above a ratio of 1 is a positive sign of future growth as it means more orders are coming in than revenues recorded. GE Healthcare’s first-quarter adjusted earnings before interest and taxes (EBIT) margin came in slightly-better-than-expected at 14.7%, up half a percentage point year over year. It’s a solid result despite down-to-flattish sales. The company said reasons for the margin growth include commercial wins; introductions of new, higher-margin products; continued price accretion; and benefits from productivity initiatives. We take a close look at margins because we believe the company’s ability to expand margins is what Wall Street underappreciates most here. In GE Healthcare’s imaging segment — home to products such as MRI and CT machines — organic revenues were flat against a difficult comparison last year, when sales increased 12%. Segment EBIT margin improved 2.1 percentage points, or 210 basis points, through productivity, price, and service contract capture rate. Organic revenue fell 4% in the company’s ultrasound segment after double-digit growth last year. Margins also declined 2 percentage points, or 200 basis points, reflecting inflation and lower volumes. GE Healthcare’s patient care solutions unit also saw a 4% drop in organic sales on an annual basis. The segment covers a range of medical devices like electrocardiogram machines and consumables used to take blood pressure readings, among others. Management said the results were due to an in-quarter fulfillment delay and a decline in Covid-related ventilator volume in China. The fulfillment issue is expected to be temporary, but the timing issue also impacted margins, which were down 3.1 percentage points, or 310 basis points. While that’s a steep decline, management argued that recently implemented programs to drive productivity and price will improve the results in future quarters. GE Healthcare’s pharmaceutical diagnostics segment — used in radiology and nuclear medicine to deliver more precise diagnoses — was a bright spot. Organic sales were up 8% year over year driven by price and volume growth. While the rest of GE Healthcare’s business battled tough year-ago comparisons, it makes sense to see pharmaceutical diagnostics performing better because it’s tied procedure growth. Segment margins improved 1.9 percentage points, or 190 basis points, from last year through price, productivity actions and volumes. It’s worth noting: This was the first quarter GE Healthcare saw an uptick in sales of Vizamyl, an amyloid imaging agent indicated for PET imaging of the brain that estimates the plaque density in adult patients with Alzheimer’s. That disclosure follows the maker of anti-amyloid Alzheimer’s treatment Leqembi reporting better-than-expected sales of the drug last week. GE Healthcare management expects a more substantial increase in Vizamyl sales in the second half of 2024 but considers it more of a longer-term play. Guidance GE Healthcare leadership offered several reasons why it remains confident in achieving its 2024 outlook, despite missing on the top and bottom lines in the first quarter. For starters, the first quarter was always expected to be the low point of the company’s year. In the second quarter, management expects a “modest” sequential improvement in organic sales and adjusted EBIT margin. Looking out to the rest of the year, management thinks the business is positioned for accelerated growth, pointing to the healthy backlog, orders growth and positive book-to-bill as visibility into their outlook. On a more granular basis, the company expects growth in its imaging segment to be supported by the backlog and order funnel; new product launches in ultrasound will lead to accelerated growth for that unit; pharmaceutical diagnostics will grow from strong procedure trends; and patient care solutions will get through its fulfillment challenges in another quarter or two. China is also a big reason why GE Healthcare has a second-half weighted guide. This isn’t new. Management said last quarter it expects growth in China to be negative in the first half of the year as it laps the strong 20% growth rate from 2023. More clarity around a new Chinese government stimulus plan in discussion could be a tailwind to orders into the second half of the year, supporting growth in 2025. CEO Peter Arduini said he believes the new plan being discussed has the potential to reach a larger group of institutions because it’s specific cash grants to buy equipment. The previous stimulus plan was an interest-free loan. However, some customers have delayed placing orders until they have a better understanding of the stimulus program. This contributed to some of the softness in the first quarter quarter. (Jim Cramer’s Charitable Trust is long GEHC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

An examination with a CT scanner is prepared in the emergency room of the university hospital (UKJ) in Jena, Germany. The GE Healthcare scanner is called the Revolution CT.

Martin Schutt | picture alliance | Getty Images

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GE Healthcare’s (GEHC) disappointing earnings offer a lesson and an opportunity

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GE Healthcare’s (GEHC) disappointing earnings offer a lesson and an opportunity

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GE Healthcare’s (GEHC) disappointing earnings offer a lesson and an opportunity

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