GEHC offers causes to look past the short-term issues in China and share costs flip upward
GE Healthcare reported a mixed second quarter on Wednesday morning, and shares initially fell sharply. Then, as the conference call following the earnings release began, the stock reversed upward. Management made it clear it believes weakness in China is temporary and sees plenty of other levers to boost earnings. Revenue rose less than 1% year over year to $4.84 billion, missing expectations of $4.87 billion, according to analyst estimates compiled by LSEG. Organic revenue growth was 1%. Adjusted earnings rose 8.7% to $1.00 per share, beating estimates by 2 cents. GE Healthcare Why We Own It: GE Healthcare is the global leader in medical imaging, diagnostics and digital healthcare solutions. Its spin-off from General Electric in 2023 allowed the now-standalone company to invest more aggressively in research and development, leading to new product innovations, particularly in artificial intelligence. The combination of new, higher-priced products and the optimization of the post-spinoff business creates an underappreciated story of margin expansion. The launch of new Alzheimer's therapies is another longer-term tailwind. Competitors: Philips and Siemens. Last purchases: November 1, 2023. Start: May 17, 2023. Bottom line: This was not the best performance of club holding GE Healthcare. China was a major source of weakness this quarter and the main factor that forced management to revise its full-year organic growth forecast downward. Unfortunately, we were not surprised. We reduced our GEHC position on Tuesday after competitor Philips reported its results and pointed to weakness in China. Chinese government stimulus programs are expected to boost business. However, the companies have been slow to receive information about the package and have delayed orders. It's early days, but the team is confident about the growth potential of an amyloid agent used in imaging Alzheimer's patients after the club name is approved. Eli Lilly's Kisunla treatment has joined Eisai and Biogen's Leqembi in the fight against the mind-robbing disease. Meanwhile, GE Healthcare management continues to execute on what it can control at a high level, and it continues to find ways to improve efficiency and, in turn, profitability. That's why GEHC was able to turn from down about 9% at the time of the release to positive by the end of the call. Shares were up nearly 4% in afternoon trading. We reiterate our Wait for Decline 2 rating and our $92 per share price target. GEHC YTD Mountain GE Healthcare YTD Quarterly Commentary Organic order growth rose 3%. Investors tend to focus on orders because they indicate customer demand. On the call, management said China was a 3 percentage point headwind to growth, meaning global revenue, excluding the world's second-largest economy, rose 4% and orders rose 6%. Despite weakness in China, we were able to deliver a healthy increase in earnings before interest and taxes (EBIT) margin to levels above what Wall Street was expecting. This helped GEHC deliver earnings that beat expectations despite the revenue decline. On the conference call, the team noted that the expansion was due to an improvement in gross margin thanks to better productivity and pricing dynamics. We believe the company's ability to expand margins is one of the more underrated aspects of GEHC's investment thesis on Wall Street. Another indicator of future demand is the backlog, which ended the second quarter at $19 billion, up from $18.7 billion at the end of the first quarter. The company's book-to-bill ratio, which measures orders received relative to sales, was 1.06, up from 1.03 in the first quarter and 1.04 in the second quarter of 2023. Anything above a ratio of 1 is a positive sign for future growth. It means that more orders are coming in than revenue is being generated. In GE Healthcare's imaging segment – which includes products such as MRI and CT machines – revenue fell almost 1% compared to the same period last year. (Organically, it was flat.) Imaging EBIT margin improved 40 basis points to 11% on productivity and pricing improvements. Quarter-on-quarter, the margin increased 130 basis points on higher volumes. Management said, “New product launches are contributing to particularly strong product demand in the U.S.” Ultrasound segment revenue fell almost 2%. Organically, it fell 1%. Ultrasound segment EBIT margin shrank 120 basis points to 21.6%, with management citing China as the main cause of weakness. Patient Care Solutions (PCS) revenue increased slightly. (Organically, they grew by 1%.) The segment includes a range of medical devices, including ECG machines and blood pressure consumables. EBIT margin for PCS shrank 90 basis points to 10.1%. The company blamed the product mix, but productivity measures offset inflation. Pharmaceutical Diagnostics (PDx) – which is used in radiology and nuclear medicine to make more precise diagnoses – was particularly strong. Segment revenue increased 12.5%. (Organically, it grew by 14%). EBIT margin for PDx improved 450 basis points to 31.2%, due to improved sales, productivity and pricing. On the conference call, CFO Jay Saccaro said, “We are encouraged by the positive developments in the molecular imaging market. We saw a continued acceleration in Vizamyl doses shipped in the US in the second quarter. These sales have tripled.” Vizamyl is an amyloid imaging agent intended for PET brain imaging, which estimates plaque density in adult Alzheimer's patients. Arduini added: “Vizamyl doses continued to increase in the US in the second quarter. With the recent FDA approval of donanemab, we expect even greater adoption of our diagnostic amyloid PET agent. While this still contributes little to sales growth, it makes us optimistic about its sales potential over the next few years.” Forecast GEHC has updated its outlook for the rest of the year and now forecasts organic sales growth of 1-2%, below the previously forecast “around 4%” and below the 3.4% that Wall Street had expected. In the conference call, management blamed continued weakness in China. CEO Peter Arduini said the company had “previously communicated that the region would see negative revenue growth in the first half of the year as we faced a difficult comparison.” He continued: “At that time, we expected positive revenue growth in the second half of the year. Today, the extended timeline for the launch of the new [Chinese] The stimulus measures announced earlier this year are impacting orders and sales. We expect China's revenue to continue to decline year-on-year in the second half of the year. And we expect China growth to be negative over the course of the year. As a result, we are lowering our full-year organic revenue growth forecast for the company as a whole.” Adjusted EBIT margin guidance was raised to a range of 15.7% to 16%, above the 15.6% expected by Wall Street, even at the low end. The team cited continued progress on “productivity and optimization initiatives.” Management reiterated its guidance for the company's adjusted effective tax rate of 23% to 25%, earnings per share of $4.20 to $4.35, and free cash flow of around $1.8 billion. For the third quarter, the team expects organic revenue growth of about 1% and adjusted EBIT margin expansion that is “relatively similar” to the 57 basis point growth in the second quarter. Wall Street has modeled an expansion of about 50 basis points. The team added that it “expects fourth quarter organic revenue growth and adjusted EBIT margin to be the highest of the year compared to last year.” (Jim Cramer's Charitable Trust has long held GEHC, LLY. A full list of stocks can be found here.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. After sending a trade alert, Jim will wait 45 minutes before buying or selling a stock from his charitable trust's portfolio. 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GE Healthcare On Wednesday morning, the company reported a mixed second quarter and shares initially fell sharply. When the conference call following the release of the results began, the stock then turned back up.
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