GE HealthCare Technologies (GEHC 0.34%) has had a great run since its spinoff from General Electric in January. But the recent announcement of a 25 million share offering has caused the stock to dip in price. That could be an excellent buying opportunity for investors. Let's see why.
What happened
Following the spinoff, GE still retained a 19.9% stake in GE HealthCare, or 90.3 million shares. That's a sizable amount, and institutional investors (mutual funds, hedge funds, pension funds, insurance funds, etc.) are likely monitoring the matter. It's expected that GE would look to liquidate its position at the right price to reduce its debt load, and that could lead to a stock overhang that needs to clear.
On June 5, GE HealthCare announced a secondary placing of 25 million shares from GE's 90.3 million shares. As noted in the GE HealthCare release:
- GE HealthCare isn't offering shares and won't receive any proceeds from the stock sale.
- GE is exchanging the 25 million shares for debt held by Morgan Stanley, and the latter will sell the stock.
- The pricing of the offering is $78 per share and closed on June 12.
All told, the offering won't result in any new shares issued (which would dilute the holdings of existing shareholders), nor will it result in any proceeds coming to GE HealthCare. However, it will allow institutional investors to buy in to or add positions at $78. That's why the share price gapped down from above $80 to around $78 on the day of the announcement of the pricing on June 7.
How institutional investors often act
The GE holding is public knowledge, and institutional investors often anticipate secondary offerings, causing them to hold off buying the stock while hoping to get a better price. In addition, the "fear" of a stock overhang needing to clear can be seen as creating more stock price weakness.
In other words, some temporary factors could be lowering the price.
Image source: Getty Images.
GE HealthCare looks like a good value
That said, long-term investors will inevitably focus on whether they are getting a good entry point for the stock or not. I think the answer to that question is "yes," and the recent weakness is a buying opportunity for retail investors.
First, the company trades on an excellent valuation based on Wall Street analyst estimates. For example, the analyst consensus is for free cash flow (FCF) of $1.96 billion in 2023, $2.25 billion in 2024, and $2.53 billion in 2025. With GE HealthCare's current market capitalization of $35 billion, those figures would result in a price-to-FCF multiple of 17.8 in 2023, 15.6 in 2024, and 13.9 in 2025. Those multiples are an excellent value for a mature company with stable margins and growth prospects merely in line with the economy.
Growth prospects
However, GE HealthCare is more than that today. The key points to the investing case for GE HealthCare lie in a combination of a margin expansion opportunity and its ability to introduce new products and improve its pricing and product offerings now that it's a stand-alone company.
Alongside many other companies reliant on technological components, GE HealthCare suffered significant cost increases in 2022 due to the supply chain crisis. As the crisis eases through 2023, there's a natural margin expansion opportunity. That's compounded by the fact that the revenue lost from the conflict in Ukraine (Russia and Ukraine were around 2% of total sales) will drop out of year-to-year comparisons.
In addition, the 40 new products released in 2022 will likely lead to margin expansion through an improvement in the margin mix. Meanwhile, management aims to improve its product portfolio by introducing new families of products that run on the same platform.
Image source: Getty Images.
There's also a long-term growth opportunity coming from the fact that GE HealthCare is the only imaging technology company (MRI scanners, CT scanners, molecular imaging) that also manufactures pharmaceutical diagnostics (injectable agents, radioactive tracers, etc.) used in conjunction with scanners for diagnostics. There's also a long-term growth opportunity from theranostics, or the use of diagnostic agents to help precisely deliver medicine to an affected area.
Is GE HealthCare a buy?
The combination of compelling valuation, excellent growth prospects, and temporary price weakness makes GE HealthCare look like a good value now, and it wouldn't be a surprise to see the price rise significantly in the coming months.
