General Electric (GE +1.71%) spinoff GE HealthCare Technologies (GEHC +1.23%) will report its fourth-quarter earnings on Jan. 30. Still, investors already have a good idea of what it will say thanks to the recent release of GE's fourth-quarter earnings. The healthcare stock hasn't received blanket coverage from Wall Street, so many institutional investors who extensively use sell-side research won't have bought in yet. As such, it's a good idea for retail investors to look at it because it looks like an excellent value.
A look at General Electric HealthCare Technologies
Starting with the numbers reported by GE, these are slightly different from what GE HealthCare will report. For reference, the figures here are on a "GE basis," meaning that they don't include "carve-out adjustments" following the spinoff. However, they are arguably a more accurate representation of ongoing performance, as the spinoff is a one-time event.
The key numbers:
- Fourth-quarter organic revenue growth was 12%, full-year organic revenue growth was 7%, and full-year revenue was $18.5 billion, slightly ahead of the $18.3 billion management gave at the recent JPMorgan Healthcare conference.
- Segment profit of $2.7 billion is above the $2.6 billion forecast on the investor day in December.
- Free cash flow (FCF) was $2.1 billion compared to the December guidance for $2.1 billion to $2.3 billion.
To put the FCF figure into context, GE HealthCare's current market cap is $31.9 billion, so its price-to-FCF multiple, based on "GE basis" figures, is 15.2 times FCF. I've previously addressed the issue of the company's net debt, around $8.5 billion, and pension obligations of $5.2 billion and how you might factor them into valuations if required.
NASDAQ: GEHC
Key Data Points
An excellent value stock
GE HealthCare looks like an excellent value on an FCF basis, and an even better value when considering a few factors around its earnings in 2022.
First, the company's earnings and FCF in 2022 were negatively impacted by supply chain challenges that have dogged the global economy over the last year. In March, GE's management had forecast $3.1 billion to $3.3 billion in earnings and FCF of above $2.7 billion. As shown, GE HealthCare missed these targets, yet full-year organic revenue growth of 7% came in at the high end of the March guidance for low-single-digit to mid-single-digit growth. Unfortunately, these issues will persist into 2023, but if you consider that they will ease through the year, margin expansion is likely in the future.
Second, the company's margin mix suffered in 2022 as lower-margin equipment revenue rose 8% to $9.6 billion compared to a 6% increase in service revenue to $8.8 billion. That could flip as equipment orders rose only 2% in the fourth quarter and 3% for the full year, compared to a service order increase of 8% in the fourth quarter and 7% for the full year.
Meanwhile, the total order growth of 5% in the fourth quarter is consistent with management's outlook for 5% to 7% revenue growth in 2023, and the orders to revenue of 1.06 in the fourth quarter implies mid-single-digit growth too.
Third, GE HealthCare is a world-class healthcare company, generating 50% of its revenue from recurring sources; it has an installed base of 400,000 imaging devices and a similar amount of ultrasound devices.
There's an obvious margin expansion opportunity in its core imaging business as management seeks to grow the current profit margin of around 13% to something approaching Siemens Healthineers' 20%-plus margin in imaging. Moreover, management sees a margin expansion pathway in imaging and patient care solutions through the new product introductions (NPI). With 35% of orders in 2021 coming from NPIs, it appears to be on the right track.
A stock to buy
GE HealthCare Technologies is trading at 15.2 times FCF with mid-single-digit revenue growth prospects and margin expansion opportunities, not least from overcoming supply chain issues and being more able to deliver on orders. Such a combination makes a good value for a business.
