The recent spinoff of General Electric's (NYSE: GE) healthcare unit, known as GE HealthCare Technologies(NASDAQ: GEHC), has been a hit with investors. Underscoring this point, GE Healthcare's shares have jumped by a healthy 16.6% since their debut on the Nasdaq stock exchange a little over a month ago.
Can this top healthcare stock continue to churn higher? Here is the bull-vs.-bear take on GE Healthcare's near-term prospects as a growth vehicle.
Steady growth at a fair price
George Budwell: GE Healthcare earns revenue through four operating segments: imaging, ultrasound,
patient care solutions, and pharmaceutical diagnostics. In the most recent quarter, the company's imaging segment accounted for over 55% of its total revenue.
What's more, GE Healthcare's imaging products, such as the OEC 3D Surgical Imaging System and the Omni Legend Molecular Imaging Device, helped to generate an impressive 18% rise in segment revenue in 2022 Q4, relative to the same period a year ago on a non-GAAP basis. Patient Care Solutions was the only other segment with a double-digit rise in sales over this period.
Imaging, in short, is the company's main growth driver and biggest earner by a wide margin. That's a big plus for shareholders, because imaging is a critical part of the healthcare services value chain. Put simply, patients are unlikely to forgo medical imaging when facing a serious diagnosis, making this particular revenue stream both recesson-proof and fairly reliable over the long term.
What does this all mean for investors? GE Healthcare ought to be able to deliver consistent levels of modest top-line growth -- in the low- to mid-single-digit range -- for the remainder of the decade. While that proposition may not sound all that enticing for growth investors, the diversified healthcare company is also currently valued at under 17 times 12-month trailing earnings on a non-GAAP basis. Its medtech peer group, by contrast, sports an average price-to-earnings ratio of 29, implying that GE Healthcare stock may be trading at steep discount right now.
All told, GE Healthcare offers investors relative safe, albeit modest, top-line growth at an attractive valuation.
These headwinds may weigh on earnings
Lee Samaha: First up, I should note that overall I'm bullish on GE Healthcare; however, with every investment decision, it's essential to consider the downside, or what could go wrong with your investment thesis. In other words, the bear case.
There are two main things to consider with GE HealthCare:
- The economic slowdown may constrain hospital budgets, and those hospitals may find ways to utilize imaging equipment more productively.
- Supply chain issues continue to affect profitability and will do so through 2023, with no guarantee that this problem could be part of a long-term trend.
The first point speaks to the fact the company's key imaging business sells high-ticket items, which rely on the capital spending of medical facilities. Moreover, if medical bodies find ways to scan more patients with the same amount of machinery, then the demand for new imaging equipment could slow.
The supply chain issues have had a significant impact on profitability. While the ultrasound segment generated an increase in earnings before interest and taxation (EBIT) of 3% year over year in 2022, the other three segments actually reported declines, and the overall business missed the full-year guidance GE's management laid out earlier in the year.
That's in no small part to ongoing supply chain issues, which affected the healthcare company's ability to deliver products and its costs. Unfortunately, those issues are continuing in 2023.
While imaging, ultrasound, and patient care solutions reported EBIT growth in the fourth quarter, pharmaceutical diagnostics reported a 22% decline. Overall, there are positive signs, but it's worth noting that these supply chain issues have gone on much longer than many had expected, and it makes sense to be concerned that it might take longer for GE Healthcare to recover profit margins than the market thinks.
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George Budwell has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.