Every stock needs a home. It’s a Wall Street truism and an idea that could create problems for a huge healthcare company that everyone knows about but no one owns.
This is GE HealthCare, which needs to improve its visibility with investors to ensure that it is well received ahead of its spin-off from
(symbol: GE) in January 2023.
The domestic truism usually refers to the divide between value-oriented investors and growth-oriented investors. Optimistic investors
(GM) stock rarely feel the same way
(TSLA), and vice versa.
This applies equally to all industries. And very soon, GE HealthCare shares will appear in the portfolios of investors who are more comfortable analyzing large industrial conglomerates than following trends in health diagnostics.
Take, for example, the closest comparable company to GE HealthCare:
(SHL. Germany). Healthineers staged its IPO in 2018. It spun off from an industrial conglomerate
(SIE. Germany), which still owns approximately 75% of the shares of Healthineers.
Today, around twenty companies cover both actions. Of this group of 20, only three analysts cover both companies for their brokerage firms. For the most part, separate people cover the pair. Healthcare analysts cover Healthineers and industry analysts cover
This is probably what will happen with GE HelathCare. The cover switch makes sense. But does the industry shift pose a risk to GE stock or GE HealthCare stock in the near future? If GE HealthCare trades weak on the exit, possible because GE shareholders reject it, then the stake GE will retain – around 20% – could drive GE stock lower. Weak trading would also leave a bad taste in everyone’s mouth.
That should be too big of a risk, though. There are some stock market differences between industrial and healthcare equipment companies, and the differences seem to favor the healthcare names.
Healthcare equipment companies
have grown sales by about 6% per year on average over the past five years and have operating profit margins at mid-day levels. These stocks are trading around 20 times estimated earnings for the next year.
Industrials companies in the S&P 500 have grown sales by about 5% per year on average and have operating profit margins of about 11%. Shares of these companies are trading at around 16 times next year’s estimated earnings.
GE HealthCare should get a healthy, healthcare-like rating. According to GE HelathCare’s chief financial officer, Helmut Zodl, the company is aiming for single-digit sales growth, around 5%, and operating profit margins in the “high-teens”.
Growth and strong profit margins for GE HealthCare, and any healthcare business, come from delivering new solutions to healthcare providers that improve healthcare outcomes for patients or reduce costs for providers, or both.
GE HealthCare has four areas to do this: Imaging which includes MR, CT and PET scanners, ultrasound imaging, patient care services and pharmaceutical diagnostics. Imaging is the largest part of the business, generating sales of around $10 billion in 2021. Ultrasound and patient care sales in 2021 were around $3 billion each. Pharmaceutical diagnostics generated approximately $2 billion.
Every business has a growth plan. Imaging, for example, is dramatically improving the throughput of its installed base of MRI machines that cost millions of dollars for around $300,000 apiece. GE has developed advanced software to essentially reduce all the noise associated with generating an MR scan. The end result is faster, more accurate images.
GE also has a new portable wireless ultrasound machine that, frankly, looks a bit like a tricorder used by Doctor Bones McCoy from Star Trek. In addition to generating sci-fi references, Vscan Air ultrasound facilitates the use of diagnostic ultrasound technology in more settings.
Expanding where and how GE tools are used seems important to GE HelathCare CEO Peter Arduini.
“What’s interesting for us is to start stepping out of our space so that we can keep one foot in what we’re really good at, but step into something new,” Arduini said. Barrons.
There seems to be a lot of potential in the shares of GE HelathCare. So should traditional GE investors make room in their portfolios when the stock hits brokerage accounts in January 2023?
It is simply too early to tell.
“Evaluate it when it comes,” says Bill Nygren, Oakmark Funds partner and director of US equity investments. His Oakmark Select fund holds GE stock. “If you can’t tell me what price something is going to trade for, I can’t begin to give you an opinion on whether I want to own it or not.”
It just seems right. Still, GE HealthCare stock shouldn’t have much trouble finding a home when it becomes a publicly traded company.
Write to Al Root at [email protected]