GE HealthCare's standout quarter shows why it's a company to own

Published Tue, Oct 31 20233:18 PM EDT

GE HealthCare Technologies (GEHC) delivered a better-than-expected third quarter and raised the low end of its full-year outlook as it continues to see strong global demand for its medical equipment and consumables technology — prompting us to reiterate a buy rating on the stock. Total revenue for the three months ended Sept. 30 increased more than 5% year-over-year, to $4.83 billion, beating analysts' expectations of $4.81 billion, according to LSEG. Adjusted earnings-per-share (EPS) of 99 cents exceeded the LSEG estimate of 90 cents a share. Shares of GE HealthCare surged roughly 5% Tuesday, to more than $66 apiece. Bottom line GE HealthCare put together a very solid quarter with mid-single-digit growth, margin expansion and accelerating investment in research and development, as the medical technology company continues to make progress on its goals as a standalone company. General Electric (GE) separated its health-care division at the start of this year. Looking ahead to next year, our thesis is unchanged: GE HealthCare should be one of the big winners from recent advancements in Alzheimer's treatments. GE HealthCare is well-positioned to capture sales from this rollout because it's one of the few firms that offer a full suite of products and technological solutions to support patients with the disease. One other aspect of the GE HealthCare story — which, candidly, has been underappreciated by us but should be more noticeable over the next few years — is the company's leadership in artificial intelligence. Not only should the integration of this advanced technology help with margins due to higher price points and the mix of software with a traditional hardware business, but it also could drive a product refresh cycle as customers look to upgrade their aging equipment. Then when you add on management's commitment to execution, innovation and optimization, what becomes evident is that there is a steady margin-expansion story in the works. As margins expand over time, the stock should be deserving of a higher price-to-earnings multiple. That's why we continue to believe the stock today is too cheap, at about 15 times 2024 earnings. We reiterate our 1 rating on the stock, meaning we would be buyers at current levels. Third-quarter results In addition to the mid-single-digit organic-revenue growth, total company orders increased by 1%. Investors tend to focus on orders because they're indicative of customer demand. The 1% growth rate was a slowdown from 6% in the second quarter and 3% in the first quarter, but it was still solid relative to the competitive landscape. Last week, GE HealthCare's Dutch peer Phillips (PHG) said its orders fell 9% in the third quarter, marking its fifth-straight quarter of declines. The wide gap in orders between the two companies suggests to us that GE HealthCare is taking market share in the industry. The company's overall backlog value was steady quarter-over-quarter, at $18.4 billion, driven by services and imaging products, even as sales increased 6%. The company's book-to-bill ratio, which is a measure of orders received relative to sales, was 1.03 in the quarter, slightly below the second quarter's 1.04 ratio. Still, anything above a ratio of 1 generally bodes well for the future as it means more orders are coming in than revenues recorded. Interestingly, revenue and orders both increased year-over-year in China. That comes on the heels of investor concern over the Chinese market given an ongoing anti-corruption campaign in the country that has targeted the health-care industry. So, it was a relief to hear management say it continues to expect a limited impact from that headwind. Notably, management said that it started to see some deals taking longer to close in the U.S. toward the end of the last quarter due to higher project costs, especially on the labor and construction side. But deals are still getting done and GE HealthCare said its recent customer pulse survey indicated no significant change in sentiment on capital spending in the second half this year versus the first half. Procedure growth and the needed refresh of an aging installed base at hospitals and clinics should support a strong 2024 and beyond. Earnings before interest and taxes (EBIT) improved 120 basis points year-over-year, to 15.4%, benefitting from productivity initiatives and pricing. The company still believes in can attain margins between a high-teen percentage and 20% in the medium term through execution on price, volume improvement, new product introductions, and further optimization of the business. Integrating AI into its products is expected to be a driver of margin improvement in the future to the tune of three-to-five percentage points on any given product. That's partly a result of the software component embedded within the company's health-care equipment. Management expects those products will have a reoccurring revenue model with margins in the 75%-to-80% range. Guidance GE HealthCare reaffirmed most of its 2023 outlook Tuesday. But the company narrowed its adjusted EPS guidance to a range of $3.75 to $3.85, compared with a previous range of $3.70 to $3.85 a share. The midpoint of this new range of $3.80 is in line with the Wall Street consensus, according to FactSet, and represents 12.4% growth on 2022. But the new midpoint implies fourth-quarter EPS of $1.04, which is below the consensus estimate of $1.14 a share. Management said Tuesday on the post-earnings conference call that the fourth quarter is shaping up to be a couple of cents lighter than the company's initial, internal forecast — though we expect that to be a somewhat conservative view. GE HealthCare continues to expect organic revenue growth of 6% to 9% for 2023, adjusted EBIT margins of 15% to 15.5%, and free cash flow conversion of at least 85%. (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 . 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