GEHC reported 23Q2 revenues of $4.82 billion, up 7.4% YOY. Revenues increased 9% organically. Orders were also up 6% organically. Equipment revenues grew 11%; while services rose 1%. The strong growth in equipment augurs well for services revenue growth over time. All segments posted revenue gains, led by Pharmaceutical Diagnostics (up 19%). Patient Care Solutions’ revenues increased 8%, Imaging was up 7% and Ultrasound eked out a 1% gain (up 3% excluding currency).
GAAP diluted EPS was $0.91 vs. $1.07 last year, but above my estimate of $0.84. Non-GAAP diluted EPS of $0.92 exceeded 22Q2’s pro forma standalone EPS of $0.82 and my estimate of $0.87.
Although revenues and earnings were better than expected, free cash flow fell short. The company reported negative free cash flow of $136 million in the quarter, bringing the half year total to positive $189 million. That equates to a free cash conversion ratio (FCF/NI) of just 23.4%. Yet, the company reaffirmed its full year FCF conversion ratio target of 85%+. Getting there will require free cash flow generation of $1.3 billion in 23H2; but that is consistent with last year’s FCF cadence.
Based up 23Q2 results, GEHC raised its 2023 organic revenue growth guidance from 5%-7% to 6%-8% and its outlook for adjusted (non-GAAP) EPS to $3.70-$3.80, up 7.5 cents at the midpoint. Its guidance for adjusted EBIT margin of 15.0%-15.5% and adjusted effective tax rate of 23%-25% are unchanged. Accordingly, I have raised my 2023 GAAP EPS estimate from $3.11 to $3.27 and non-GAAP estimate from $3.72 to $3.86. For 2024, I anticipate GAAP EPS of $3.67 and non-GAAP EPS of $4.19, up about a nickel.
GEHC’s share price has fallen 12.5% since immediately before its 23Q2 earnings announcement. It has underperformed the S&P 500 over that time, but is still up vs. the S&P since the beginning of the year.
Based upon the increased risk of meeting its cash flow guidance and the stock’s recent drop in price, I have lowered my price target from $89 to $85. The new price target equates to a forward multiple of 23.2 applied to projected GAAP EPS of $3.67. The assumed forward multiple is down from 24.9 previously, but it is still higher than the current forward multiple of 22.1 (so the price target assumes some multiple expansion in part due to a recovery in GEHC’s share price). The implied non-GAAP forward multiple is 20.2, down from 21.4. Given the recent share price drop, the $85 price target offers a potential total return of 17%. I am therefore maintaining my performance rating of “2” (Outperform), which was set on August 7 (see M&P Monitor #8).
With the recent price decline, there is no evidence yet that the stock has bottomed, but from a technical point of view, it is now oversold, which should hopefully allow it to find a support level sometime soon.
This is a summary of my recent update report on GE Healthcare Technologies, originally published on August 10, 2023. To obtain a copy of the full report, please reach out to me using the contact information provided below.
August 17, 2023
Stephen P. Percoco
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Linden, New Jersey 07036
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