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Msg  7290 of 7331  at  9/18/2022 9:26:39 PM  by

jerrykrause


Will GE HealthCare Stock Find a Home With Investors After the Spin?

 

Will GE HealthCare Stock Find a Home With Investors After the Spin?

 

Peter Arduini will be responsible for generating value for shareholders of GE HealthCare. PHOTO: Barron's Staff

Every stock needs a home . That is a truism on Wall Street and an idea that could create some problems for a huge healthcare company that everyone knows but no one owns.

That is GE HealthCare, which needs to raise its profile with investors to ensure it is welcomed in the door before its spin off from General Electric (ticker: GE) in Jan. 2023.

The home truism usually refers to the divide between value investors and growth investors. Investors bullish on General Motors (GM) stock rarely feel similarly about Tesla (TSLA), and vice versa.

It applies across industries, too. And very shortly GE HealthCare stock is going to show up in portfolios of investors who are more comfortable analyzing large industrial conglomerates than they are following health diagnostic trends.

Take, for instance, GE HealthCare's closest comparable company: Siemens Healthineers (SHL. Germany). Healthineers held its initial public offering back in 2018. It came out of industrial conglomerate Siemens (SIE. Germany), which still owns about 75% of Healthineers stock.

Today, about 20 firms cover both stocks. Of that 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 industrial analysts cover Siemens.

That is probably what will happen with GE HelathCare. The coverage switch makes some sense. But does the industry switcheroo represent a risk to GE stock, or GE HealthCare stock in the near future? If GE HealthCare trades weakly out of the gate, possible as GE shareholders dump it, then the portion GE will keep—roughly 20%—could drag down GE shares. Weak trading would also leave a bad taste in everyone's mouths.

That should be too large 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 in the S&P 500 have grown sales at about 6% a year on average for the past five years and have operating profit margins at the midteens level. Those stocks trade for about 20 times estimated next year's earnings.

Industrial companies in the S&P 500 have grown sales at about 5% a year on average and have operating profit margins around 11%. Shares of those companies trade for about 16 times next year's estimate earnings.

GE HealthCare should get a healthy heath care-like valuation. The company is targeting mid-single digit sales growth—that is, around 5%—and operating profit margins in the "high-teens" according to GE HelathCare CFO Helmut Zodl.

Growth and solid profit margins for GE HealthCare, and any healthcare business, come from offering new solutions to healthcare providers that either improve healthcare outcomes for patients or lower costs for providers, or both.

GE HealthCare has four areas to do that in: Imaging which includes MR, CT and PET scanners, ultrasound imaging, patient care services, and pharmaceutical diagnostics. Imaging is the largest piece of the business, generating 2021 sales of about $10 billion. Ultrasound and patient care sales in 2021 came in at about $3 billion each. Pharma diagnostics generated about $2 billion.

Each business has a plan for growth. Imaging, for instance, is dramatically improving the throughput of its installed base of MRI machines which cost millions of dollars for about $300,000 a piece. 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 wireless hand-held ultrasound that, frankly, looks a little like a tricorder used by Star Trek doctor Bones McCoy. Along with generating sci-fi references, the Vscan Air ultrasound makes it easier to use ultrasound diagnostic technology in more settings.

Expanding where and how GE tools are used feels important to GE HelathCare CEO Peter Arduini .

"The interesting thing for us is to start spanning out of our space in a way that we can actually keep a foot in what we're really good at but step into something new," Arduini tells Barron's.

It seems as if there is a lot of potential in GE HelathCare shares. So, should the traditional GE investors make room in their portfolios when shares show up in brokerage accounts in Jan. 2023?

It's just too early to tell.

"Evaluate it when it comes ," says Oakmark Funds partner and U.S. equities chief investment offer Bill Nygren . His Oakmark Select fund holds GE stock. "If you can't tell me the price something is going to trade at, I can't begin to give you an opinion if I want to own it or not."

That sounds about right. Still, GE HealthCare stock shouldn't have much trouble finding a home when it becomes a separately traded public company.

 


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