GE Healthcare Technologies (GEHC) reported 24Q2 revenues of $4.84 billion, up 0.5% YOY and but 1.9% below my estimate. Excluding currency and acquisitions, revenue increased 1%. Revenues declined in all segments, except PDx, which rose 12.5%. Sales in China fell 15%. Excluding China, global sales growth was 4%. Orders increased 3% (or 6%, excluding China).
Despite the China headwinds, 24Q2 operating income rose 6.7% to $609 million, with operating margin up 80 bp to 12.6%. This consisted of a 110 bp rise in gross margin, a 20 bp improvement in the SG&A expense ratio, partially offset by a 50 bp rise in R&D/sales. Operating margin benefited from implementing lean management practices and introducing new products with higher margins. Interest expense eased due to lower debt levels. Taxes rose by 4.4%, with the effective tax rate up 70 bp to 24.7%. Thus, GAAP net income available to shareholders and GAAP EPS both increased by 2.6% to $430 million and $0.94, respectively. Non-GAAP EPS rose 9.2% to $1.01, a penny better than my estimate of $1.00.
Although GEHC had expected China sales headwinds to recede in 24H2, but it now expects them to continue. Consequently, it has lowered its 2024 organic sales growth guidance from 4% to 1%-2%. It anticipates that the slower sales growth will be offset by a 10 bp increase in adjusted EBIT margin to 15.7%-16.7%. Otherwise, its guidance is unchanged, with adjusted EPS of $4.20-$4.35 and free cash flow of $1.8 billion.
Based upon 24Q2 results, I have lowered my 2024 GAAP EPS estimate from $4.22 to $4.09. My 2024 non-GAAP EPS estimate is now $4.34, up from $4.32. Projected 2025 GAAP EPS is $4.60, up from $4.55, and non-GAAP EPS is $4.55, unchanged from my previous report.
I am maintaining my price target for GEHC’s stock of $91, which equates to slightly less than 20 times projected 2025 GAAP EPS of $4.60 and also 20 times projected non-GAAP EPS of $4.55. Those multiples are roughly in line with the current forward multiples for GEHC’s peer group. (A list of stocks included in the peer group is on page 6.)
Since my last report May 31, GEHC’s stock has advanced 8.8%, better than the S&P 500’s 5.7% and the peer group average gain of 5.1%. GEHC reached an intraday high of $88.25 on July 31, but has since fallen back to its current level of $85.30. Even so, the stock remains in an uptrend from its end of May lows. It currently trades at a modest discount to peers. My forward valuation multiple assumes that this discount will be eliminated over time.
With its recent advance, the stock’s potential return is now 7.4%, including its 0.1% dividend yield. Accordingly, I am reducing my performance rating from “1” (Buy) to “3” (Neutral).
This is a summary of my recent report on GE Healthcare Technologies, Inc. (GEHC). To obtain a copy of the report, please reach out to me using the contact information provided below.
August 20, 2024 (Report published on August 15, 2024.)
Stephen P. Percoco
Lark Research
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© 2015-2024 by Stephen P. Percoco, Lark Research. All rights reserved.
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