Taking a Look at GE Healthcare Technologies

This newly public company has a long history of innovation.

At the time of writing this, I own shares in GEHC. This is not financial advice, and is meant for informational and entertainment purposes only.

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Taking a Look at GE Healthcare

On January 4, 2023, GE Healthcare Technologies, GEHC 0.00%↑, began trading as its own, independent company. After 125 years of being lumped together in General Electric, GE Healthcare was spun off into its own publicly traded company. Now that shares of GEHC have been trading for some time, I thought it would be a good time to check up on GE Healthcare, learn about their business, financials, and determine if this stock is worth not only my time, but my money. So let’s take a look at GE Healthcare.

What Does GE Healthcare Do?

GE Healthcare (GEHC) describes themselves as a “leading global medical technology, pharmaceutical diagnostics, and digital solutions innovator… [GEHC] generate[s] revenue from the sale of medical devices, single-use and consumable products, service capabilities, and digital solutions.” They continue on to say “Our customers are healthcare providers and researchers, including public, private, and academic institutions that comprise an estimated $87 billion global industry”.

Maybe to make this too simple, if you go to the doctor for an MRI, ultrasound, or X-ray, the equipment being used is likely made by GEHC. They also operate in Patient Care Solutions, which can be thought of patient monitoring technology (vitals, anesthesia, infant care, etc), and Pharmaceutical Diagnostics (molecular imaging). So if you’re having surgery, the equipment used to monitor you is also likely made by GEHC. Again, this is a simple explanation, but I hope it gives you an idea of what they make.

As I have alluded to previously, GEHC separates its business into four segments: Imaging, Ultrasound, Patient Care Solutions, and Pharmaceutical Diagnostics. These segments’ financial details will be discussed later in this article.

GEHC believes they benefit from the following macro healthcare trends:

• Growing adoption of precision care.

• Digitization of healthcare.

• Increasing demand for healthcare driven by demographic trends.

• Improving access to healthcare in emerging markets.

• Expansion of alternative sites of care.

• Adoption of the Quadruple Aim of healthcare (improving population health, reducing cost of care, enhancing the patient experience, and improving provider satisfaction).

GEHC competes with a variety of companies, including but not limited to: Siemens Healtineers, Philips Healthcare, Canon, United Imaging, Bayer, and Bracco.

Revenues are highest in the fourth quarter due to the spending patterns of customers. This translates to cash from operating activities to be highest during this quarter, and inventory levels to be lowest.

The GE Spin-Off

As before mentioned, GEHC began trading as its own independent company on January 3, 2023. GE distributed 80.1% of total outstanding shares of GEHC, retaining the remainder.

It may go without saying, but GEHC has historically relied on GE to manage certain aspects and costs of their operations, which will now be entirely incurred by GEHC, as opposed to being allocated across GE. Along with this, GEHC will incur certain stand-alone company expenses, including relating to external reporting, internal audit, treasury, investor relations, and stock-related administration, of which they did not before incur. I would expect these expenses to initially have a negative effect on cash flows due to comparisons before GEHC went public, but will soon be forgotten.

Important Metrics for Measuring Performance

The following metrics are what GEHC believes are most important in measuring their performance, so in following discussions of their quarterly reports these will be the metrics I discuss.

• Total Revenues (Organic revenue growth).

• Remaining Performance Obligations (RPO). “RPO represents the estimated revenue expected from customer contracts that are partially or fully unperformed inclusive of amounts deferred in contract liabilities, excluding contracts, or portions thereof, that provide the customer with the ability to cancel or terminate without incurring a substantive penalty.” This is GEHC’s backlog, contracts signed but not yet completed.

• Business Performance (Operating Income and Net Income). In this category I will also consider YoY growth and margins.

• Cash Flow. Free Cash Flow is king for a mature, slower-growth company. FCF will allow GEHC to grow their dividend and eventually purchase shares, along with pay down their debt.

GEHC reports several non-GAAP financial measures, including: Organic revenue and Organic revenue growth rate, Adjusted EBIT and Adjusted EBIT margin, Adjusted net income, Adjusted EPS, and Free Cash Flow. All of these I believe to be important in determining the financial health of GEHC, and will be discussed in future reports.

The Financials

Imaging is by far GEHC’s leading segment, accounting for 54.4% of all revenues in 2022. Total revenues for 2022 were $18.341 billion, with $12.044 billion in product revenue and $6.297 billion in services revenue. Revenues grew 4.3% in 2022 compared to 2021, and I expect this to be near the long-term average for GEHC. It is important to note that operating income grew 6.3% from 2021 to 2022, meaning they were able to increase operating efficiency despite a planned increase in R&D spending. This will be critical for GEHC moving forward, as bottom line growth will only be partially helped by top line growth.

As GEHC begins its journey as a publicly traded company, I will have a close eye on margins. As of the end of the 2022 fiscal year, the gross margin came in at 39%, operating margin at 13.8%, and net profit margin at 10.4%. To break down the gross margin number even further, gross products margin was 33.8%, and gross services margin was 49.4%. Sustainable growth in services revenue and margin will be a critical component of long-term success for GEHC.

Jumping ahead in time here, as of June 30, 2023, GEHC has a very healthy balance sheet. Cash has already increased by nearly $500 million since GEHC went public, driven by strong free cash flow. With a current ratio of 1.22 (Current Ratio = Current Assets/Current Liabilities, and measures how well a company can cover their short-term liabilities with their short-term assets), they have no liquidity issues in the coming year. GEHC is in a financial position that can support future growth and more lucrative shareholder return policies. They currently have an annual dividend of $0.12, a 0.17% yield. I am happy with this tiny dividend, as I would rather see this company accumulate a large cash pile before significant increases to the dividend. While they have the balance sheet to pay more, they have no hurry to throw all their cash out the door.

Debt

GEHC has no date of significant debt coming due, as most of their debt is scattered. Since the time of their annual report filing, as seen above, GE has added roughly $1.95 billion in debt, with total long-term debt on their balance sheet as of June 30, 2023 of $10.233 billion. Again, this debt is long-term fixed, and will pose absolutely no issue to GEHC, assuming their is no material adverse change to their business.

Valuation

I often like to value companies based on historic valuations. That is, comparing a company’s current PE ratio, or some other metric, to what it has historically traded at in the past. Since we can’t do that, we will compare their current statistics to the overall stock market (S&P 500). GEHC has a current PE ratio of 19 and a forward PE ratio of 17.5, which means it trades to a discount to the overall market multiple. Current free cash flow yield if 5.7%, as compared to the S&P 500 average of 2.8%. This is a wonderful yield that shows the long-term strength of GEHC’s cash flows.

One final metric we can look at for GEHC is return-on-equity (ROE). For the trailing-twelve-month period, GEHC’s ROE is 26%, as compared to the industry average of 8%, and S&P 500 average of 18.6%. This is a very impressive number, and I will be interested to see if they can continue this type of return. If they are able, I have no doubt shareholders will be rewarded in the long run.

Making the Case for GE Healthcare

I have recently joined the shareholder part for GEHC, maybe later than I should have. Forgetting the steller free cash flow yield and ROE, which I view as a margin of safety, the story for GEHC is incredible. As mentioned by management, they have several tailwinds, including an aging population and increasing access to healthcare in emerging markets, that I believe will be long-term drivers of growth. While they believe their industry will continue growing at a mid-single-digit growth rate, I would not be surprised to see low double digit growth, pushed by increasing access to healthcare, among the before mentioned trends. I am definitely bullish on growth in healthcare.

In terms of valuation, I am 100% willing to pay 17.5x next years earnings for a company with a free cash flow yield of 5.7% and ROE of 26%. Both of these are well above sector and stock market averages, and I have no reason to believe this will change in the future. While analysts do not project massive growth in the future, I do expect cash flow to be the story for GEHC. Can GEHC grow, or at least maintain, their free cash flow over time, while returning cash to shareholders? I am sure this is at the top of management’s thinking, and I expect this to be the course of action moving forward.

I will be adding quarterly coverage of GEHC to The Simple Stock Report, bringing the coverage list to five companies: Procter & Gamble, Kimberly-Clark, 3M, Kenvue, and GE Healthcare. Like Kenvue, this is a company with a long history of operations and a short history of being public. I expect GE Healthcare will take advantage of the growth opportunities in healthcare and reward shareholders while they are at it.