What happened
Shares of General Electric spinoff GE HealthCare Technologies (GEHC -2.12%) tumbled 8.9% through 10:30 a.m. ET despite reporting revenue and profits figures Tuesday morning that both beat analyst expectations.
Heading into Q1 2023, Wall Street had forecast GE HealthCare would earn a $0.79-per-share adjusted profit on sales of $4.6 billion. As it turned out, GEHC earned $0.85 per share (adjusted), with sales coming in at $4.7 billion.
So what
So, good news, right? Well, not entirely.
Compared to Q1 2022, when it was still part of parent company General Electric (GE 0.51%), GE HealthCare grew its revenue 8% year over year, with pharmaceutical diagnostics showing the strongest gains (up 15%) and ultrasound the worst performance, at just 5% growth. Adjusted earnings declined more than 11% year over year, while earnings as calculated according to generally accepted accounting principles (GAAP) declined by more than half, to just $0.41 per share -- less than half the adjusted figure.
Rising interest rates on GE HealthCare's $10.2 billion debt load accounted for part of the decline in profits, contributing to a 110-basis point contraction in net profit margins -- now 7.9%. Preferred stock dividends took an even bigger bite out of profits, costing common stockholders $183 million.
Now what
The weak GAAP profits probably account for some investor dismay over today's results. Guidance for the rest of 2023 wasn't entirely encouraging, either.
Turning to its full-year forecast, management predicted organic revenue growth (i.e., not counting any gains from mergers and acquisitions) of between 5% and 7% over the course of 2023. Taken at the midpoint, this implies revenues of perhaps $19.4 billion this year, which appears likely to edge out the analysts' target of $19.2 billion. Adjusted earnings, on the other hand (GE HealthCare does not give a GAAP earnings forecast), appear likely to fall short of expectations.
GE HealthCare is reaffirming its adjusted earnings forecast between $3.60 and $3.75 per share. On the plus side, this would represent 7% to 11% year-over-year growth, significantly faster than revenue growth. However, analysts were hoping to see GE HealthCare produce adjusted profits of $3.72 per share -- and the midpoint of management's guidance range is only $3.68 per share.
Between the fact that GE HealthCare's guidance isn't as rosy as the Street may have been expecting and its predicted earnings work out to a current-year P/E ratio of nearly 22x -- more than twice the maximum rate of percentage earnings growth -- it seems investors selling off GE HealthCare stock this morning are making the right call.
CORRECTION: The original version of this report should have said that GE HealthCare Technologies was restating its earnings forecast.
