We're starting a new position in one of the Big 3 global medical imaging and diagnostics companies

Published Wed, May 17 20231:30 PM EDT

We're initiating a position in GE Healthcare (GEHC), buying 325 shares at roughly $79 each. Following Wednesday's trade, GEHC will have about a 0.95% weighting in Jim Cramer's Charitable Trust, the portfolio we use for the Club. GE Healthcare is the global leader in medical imaging, diagnostics, and digital solutions. The company operates in an $84 billion total addressable market that the company sees growing to around $100 billion by 2024 due to an aging population and increasing Medicare enrollment in the United States. GEHC is one of the Big 3 in its field, the others being Siemens and Philips. Together, they account for about 60% to 70% of global market share. GE Healthcare serves over 1 billion patients worldwide and has an installed base of more than 4 million pieces of equipment. The company does about $18 billion in revenue annually, about half of which is recurring. GE Healthcare operates four business segments: Imaging, Ultrasound, Patient Care Solutions, and Pharmaceutical Diagnostics. Imaging is a $44 billion industry growing at a rate of about 4% to 6% over the next few years. This is GEHC's largest segment, generating about $9.5 billion in revenue last year at a margin of around 13.1%. However, management thinks they can expand margins to the high teens over the next few years. GE Healthcare has leadership in nearly every market, with some of its key products being X-Rays, MRIs, CT scans, and women's health machines that specialize in mammography and bone/metabolic health. Ultrasound is a $12 billion industry growing at a rate of 4% to 7% over the next few years. GE Healthcare is a leader in this field with about 30% of global market share. Its business generated about $3.1 billion of revenue last year at a margin of 27.9%. One thing that's great about this business is the need for machines to be refreshed. Typically, ultrasound machines need to be retired every five to seven years, so there is always an upgrade cycle happening here. Patient Care Solutions is an $18 billion industry growing at a rate of 3% to 6%. GEHC's business did about $3 billion in revenue last year at a margin of around 12.2%. But, management thinks they can expand margins to the high teens over the next few years. Some of the key product lines here are patient monitoring, anesthesia delivery and respiratory care, diagnostic cardiology, and maternal/infant care. GE Healthcare's Patient Care Solutions take clinical data and transform them into real-time visualizations and clinical decision support in acute care, emergency room, operating room, and intensive care unit settings. Pharmaceutical Diagnostics is a $10 billion industry growing at about 4% to 5%. GE Healthcare is one of the global leaders in Precision Diagnostics with an industry-leading injectable pharmaceutical portfolio in contrast media and molecular imaging. GEHC did about $2 billion in revenue last year at a segment margin of about 34.3%. So where does management see this company headed? Coming out of GEHC's separation from General Electric (GE), management set the following medium-term financial targets. They expect a 4% to 6% revenue compound annual growth rate with adjusted EBIT margins expanding to the range of high teens to 20% from about 16% in 2022 and strong free cash flow generation. (EBIT stands for earnings before interest and taxes.) The company plans to use its cash flow to pay down debt and invest in organic and inorganic opportunities. GE Healthcare recently initiated a very small dividend of about 3 cents per share. But it will grow over time. One of the more interesting potential new market opportunities that lies ahead for GE Healthcare is in Alzheimer's treatments. GE Healthcare is one of a few companies that offer a full suite of products and solutions to support patients. This includes PET scanners, which are used to confirm diagnosis, and MRI systems to monitor therapy. GEHC also has a diagnostic agent called Vizamyl, which is a tracer for amyloid-beta plaque detection and quantification. This is an example of a Pharmaceutical Diagnostic. Remember, the FDA granted accelerated approval to an anti-amyloid drug — developed by Japanese pharmaceutical firm Eisai and U.S.-based partner Biogen (BIIB) — in early January. The FDA is expected to decide on full approval for that treatment, marketed under the name Leqembi, in July. Leqembi currently requires one MRI scan to get a baseline and three additional scans in the first year of taking the drug. Regular MRIs will likely be needed over time. If the Centers for Medicare & Medicaid Services decides to broadly cover anti-amyloid treatments like Leqembi and Eli Lilly 's (LLY) donanemab, as we expect them to, it will create a lot of demand for MRI machines as hospitals and clinics beef up their infrastructure to meet the need of patients. Lily is also a Club stock. Now that GEHC has fallen from its high of around $88 to just around $79, the stock valuation screens attractively relative to some of its MedTech peers. Management has earnings-per-share (EPS) guidance for this year at $3.60 to $3.75. But, that's artificially down because the company had to absorb costs related to the spinoff and separation from GE. GEHC YTD mountain GE Healthcare YTD performance Analysts see GE Healthcare growing EPS to $4.33 in 2024, about a 15% increase from this year's outlook. That puts the stock trading at around 18 times 2024 earnings, an undemanding valuation with plenty of room for multiple expansion if management delivers on its plan. If we put a roughly 21 times multiple on those earnings, a discount to some other companies in the space like Abbott Laboratories (ABT) and Boston Scientific (BSX), we get a $91 stock price. That's the price target we are using to start, about 17% upside from Tuesday's close. (Jim Cramer's Charitable Trust is long GEHC, LLY. 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.

Jim Cramer at the NYSE, June 30, 2022.

Virginia Sherwood | CNBC