GE Healthcare Technologies (GEHC) 23Q1 Update

GEHC reported 23Q1 revenues of $4.71 billion, up 8.4% YOY.  Excluding currency, revenue increased 12.4%.  Operating income rose 9.8% to $559 million.  Incremental interest expense from debt taken on in the spin-off plus an increase in the effective tax rate from 25% to 30% more than offset a big increase in non-operating benefit income.  Thus, net income declined 4.7% in the quarter to $372 million.

GEHC also recorded a $183 million deemed preferred stock dividend on its redeemable noncontrolling interests (as the spin-off triggered an opportunity to receive a special distribution).  As a result, net income attributable to GEHC shareholders declined 51.4% to $189 million, and GAAP EPS per diluted share decreased by a comparable percentage from $0.86 to $0.41.

Excluding that deemed preferred stock dividend and other special items, adjusted (non-GAAP) EPS was $0.85.  That exceeded the mean analysts’ estimate of $0.79.  Last year’s adjusted EPS was $0.96.  However, adjusting further for the pro forma after-tax impact of standalone operating costs and incremental interest expense, 22Q1’s standalone adjusted EPS was $0.63.

The company reported growth across all of its segments, assisted by an easing of parts shortages caused by supply chain dislocations.  Positive pricing and productivity improvements helped expand margins. Orders remained slightly ahead of billings, which should help sustain modest revenue growth.

GEHC has initiated a $0.03 per share quarterly dividend.  Management reaffirmed its 2023 guidance of organic revenue growth of 5%-7%, an 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%+.

Based upon GEHC’s 23Q1 results (and the unanticipated deemed preferred dividend), I have lowered my 2023 GAAP EPS estimate from $3.18 to $3.11, but my non-GAAP EPS estimate is unchanged at $3.72.  For 2024, I now expect GAAP EPS of $3.58, up from $3.54 and non-GAAP EPS of $4.14, up from $4.09.

GEHC’s share price is up 38.7% since it started trading in December, better that the S&P 500’s 15.5% total return.  The stock’s momentum has slowed since the end of April, however, and the stock has underperformed after its sharp run-up.  Its recent underperformance may also be attributable to a 25 million secondary share offering of GEHC stock by GE which was priced at $78.00 on June 8.

With that overhang now out of the way, I am raising my price target on GEHC to $89 from $82 previously.  The new target is based upon an assumed one-year forward multiple of 25 multiplied by projected 2024 GAAP EPS of $3.58 (and 21.4 multiple times projected 2024 non-GAAP EPS of $4.18.  Both valuation multiples are equal to the stock’s current 2023 forward multiples.  The new price target represents a potential 12-month total return of 13.3%.  Accordingly, I am raising my performance rating on GEHC’s stock from “3” (Neutral) to “2” (Outperform).

This is a summary of my recent update report on GE Healthcare Technologies, Inc. (GEHC). To obtain a copy of the full report, please reach out to me using the contact information provided below.

June 19, 2023

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

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