In its first earnings release since being spun off from General Electric, GEHC reported revenues of $4.9 billion, up 8% YOY (and up 13%, net of acquisitions and currency). Net income from continuing operations was flat at $567 million. GAAP EPS was $1.21 and adjusted EPS, excluding mostly restructuring costs and amortization of acquisition-related intangible assets, was $1.31. I had projected revenues of $4.8 billion and GAAP EPS of $1.06.
The company benefited from robust demand, improved product fulfillment (as supply chain pressures eased), and better pricing. Aided in part by a book-to-bill ratio of 1.07, GEHC ended the year with a strong backlog that will help boost revenue in 23H1. Cost pressures are continuing, but easing; so the company expects more margin improvement in 23H2. Similarly, free cash flow conversion is expected to be stronger in 23H2.
By segment, Imaging reported revenues of $2.7 billion, up 11%, with EBIT of $321 million and EBIT margin of 11.8%, both down vs. the prior year. The segment benefitted from new product introductions and improved supply chain fulfillment. Ultrasound posted revenues of $956 million, up 6%; EBIT of $285 million; and EBIT margin of 29.8%, with higher EBIT and lower EBIT margin than a year ago. Revenues increased across most customer segments, but cost inflation and higher R&D spending, more than offset price improvement. Patient Care Solutions (PCS) recorded mid-single-digit revenue growth (to $786 million), but EBIT surged 43% to $130 million, reflecting a 410 bp increase in EBIT margin to 16.5%. The gain in revenues was driven by decreased supply chain headwinds and price increases. The jump in EBIT margins came from everywhere—higher prices and volume and lower costs—partially offset by cost inflation. Pharmaceutical Diagnostics (PDx) went the other way, with revenues down 5% to $473 million and EBIT falling 22% to 109 million. The decline in revenues came from lower volumes in China and U.S. customers’ normalization of inventory. EBIT margins were hurt by raw materials price inflation and lower volumes.
For 2023, GEHC currently expects organic revenue growth of 5%-7%, adjusted EBIT margin of 15.0%-15.5%, an adjusted income tax rate of 23%-25%, adjusted EPS of $3.60-$3.75 and a free cash flow conversion rate of 85% (of net income).
Management says that revenue growth will be strongest in 23H1, owing to the high order backlog; but revenue growth will normalize in 23H2. It expects that the implied 50 bp improvement in adjusted EBIT margin will occur mostly in 23H2. Likewise, the free cash flow conversion rate will be lower in 23H1 and improve in the second half.
Based upon GEHC’s stronger-than-anticipated 22Q4 results, management’s guidance and 2022 trends in its financial performance (including especially segment results), I have raised my projection for 2023 GAAP EPS from $3.09 to $3.20 and for 2023 Non-GAAP EPS from $3.57 to $3.73. Similarly, I have raised my projection for 2024 GAAP EPS to $3.59 from $3.47 and 2024 Non-GAAP EPS to $4.11 from $3.95.
Since the spin-off, GEHC’s share price has risen 10.4% from $63.00 at the start of trading to close today at $70.55. Applying a valuation multiple of 21.5 times to the 2024 GAAP EPS estimate of $3.59 (or 18.7 times to the 2024 Non-GAAP estimate of $4.11, my revised price target is $77.00 (up from $67.00). That represents a potential return of about 9% from the current quote and does not consider the possibility that GEHC could initiate a dividend during the course of the year. Accordingly, although it is a close call, the stock still merits a performance rating of Outperform, despite its strong advance during the month of January. Barring any negative surprises, 22H1 performance, with strong revenue growth but modest profit growth, looks set. The focus will then be on whether GEHC will deliver on its guidance of an expansion in adjusted EBIT margin and a higher cash flow conversion rate in 22H2.
February 8, 2023
Stephen P. Percoco
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