GEHC stock finally gets some respect after earnings. Those betting against it got slammed

Published Tue, Feb 6 20244:29 PM EST

Business at GE Healthcare Technologies capped off 2023 on a strong note despite ongoing concerns about China. That coupled with management's upbeat view of this year propelled shares up more than 13% to over $83 each at session highs. That was their highest level since July 2023. The Club stock closed just under $82. Total revenue increased more than 5% year over year to $5.21 billion, beating analysts' expectations of $5.1 billion, according to LSEG. Adjusted earnings-per-share (EPS) of $1.18 exceeded the LSEG estimate of $1.07. Bottom line We always say expectations matter when it comes to earnings season. Sometimes a company can do everything right and deliver a strong quarter but see its stock fall because expectations had gotten a little ahead of themselves. That was Eli Lilly , which also reported earnings Tuesday. In other examples, the stock is down so much that it already anticipates a miss. When the company does miss but the results aren't as bad as feared, the quarter becomes a clearing event, and the bad quarter becomes the starting point of a new rally. Starbucks 's results last week were a great example of this. The quarterly earnings result from GE Healthcare on Tuesday is the best of both worlds. Expectations were so low partly due to fears about China — and we shared some of those concerns about earnings — and uncertainty about its ability to hit its post-spin financial targets. But here's the thing: Despite an analyst community that doesn't care for GEHC, it never was bad. It was spun off last year from General Electric and then started to fall for reasons that had nothing to do with the company's performance or prospects. GEHC makes all manner of medical equipment from ultrasounds to MRIs to CT scanners, and it also makes pharmaceutical diagnostics agents and offers patient care services. But there was never anything wrong with it. We were confused about how a quality company's stock could have fallen like it did. It's also why we gobbled it up at less than $70 per share a handful of times last year. When expectations are low, the stock is cheaply priced versus peers, and management continues to beat expectations while reiterating its path of ongoing margin improvement, you get a reaction in a stock like what we are seeing today with GE Healthcare. Jim Cramer was less diplomatic in a post on X, formerly known as Twitter. We're keeping our 2 rating on the stock but nudging up our price target by a buck to $92 per share. The stock should be able to grind higher if management can beat and raise through the year. Quarterly commentary In addition to the mid-single-digit organic revenue growth, total company orders increased by 3%. Investors tend to focus on orders because they're indicative of customer demand. This result should be well received for two reasons. First, the 3% growth rate was an improvement from the 1% increase in the third quarter and much better than feared in light of concerns about China's anti-corruption campaign against its healthcare industry. Second, GE Healthcare continues to outperform its peers. Last week, Philips said its orders fell 3% in the fourth quarter, marking its sixth-straight quarter of declines. The continued divergence in orders between the two companies suggests GE HealthCare is taking market share in the industry. The company's overall backlog value exited the year at a record $19.1 billion, up $700 million from the third quarter. The company believes this provides them with visibility into 2025. The company's book-to-bill ratio, which is a measure of orders received relative to sales, was 1.05x, an improvement from 1.03x in the third quarter. Anything above a ratio of 1 generally bodes well for the future as it means more orders are coming in than revenues recorded. Fourth quarter earnings before interest and taxes (EBIT) were flat year over year at 16.1% but improved 70 basis points from the third quarter. The company still believes it can attain margins between high-teens and 20% in the medium term through execution on price, volume improvement, higher margin new product introductions, and further optimization of the business. GE Healthcare was hit by an analyst downgrade to sell last November on concerns that its pricing tailwinds were over, limiting its ability to deliver on its margin target. We continue to struggle with this bearish view. Management expects to take 1% to 2% price in 2024 and continue with that plan going forward. But what makes us even more bullish about margins in the future is the integration of artificial intelligence and software into its products. We touched on this after the company presented at the JPMorgan Healthcare conference in January. In the long term, we're encouraged by GEHC's role in screening and managing patients for a new class of Alzheimer's drugs and treatments in the pipeline for other conditions. On the post-earnings call, management said, "New therapies are going to come out. And as they do grow, they're going to require our equipment to image and manage safety." Guidance As for the guide, we think management set reasonable, yet beatable expectations for all of 2024. The company expects organic revenue growth of approximately 4% which puts sales roughly in line with estimates of $20.3 billion. Adjusted EBIT margins are expected to improve 50 to 80 basis points to the range of 15.6% to 15.9%, which at a midpoint of 15.75% is a little bit above estimates of 15.72%. We expect management will revise this guide higher through the year. Adjusted EPS are expected to be in the range of $4.20 to $4.35, representing growth of 7% to 11% versus 2023. We're pleased to see this midpoint of $4.28 exceeded the consensus estimate of $4.24. It's worth pointing out that a soft China is contemplated in this outlook. Management expects growth in China to be negative in the first half of the year as it laps the strong 20% growth rate from 2023 and the return to growth in the second half. Lastly, GE Healthcare continues to have a more upbeat view of the capital equipment spending environment versus last year based on increased buying and ordering patterns, positive internal survey work of customers, and improved hospital profitability. We think interest rate cuts later this year by the Federal Reserve — the number of which is up for debate — could further improve the purchasing environment. (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. 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A GE Healthcare Ltd. BioProcess machine stands on display during the International Pharmaceutical Expo (Interphex) in New York.

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