We're hiking our GEHC price target, looking beyond a mixed quarter to next year's catalysts

GE Healthcare reported a mixed quarter before Wednesday's opening bell. While revenue slightly missed, an earnings beat along with a number of other positives pushed the stock higher. Revenue rose just under 1% year over year to $4.86 billion in the third quarter, just short the $4.87 billion expected, according to analyst estimates compiled by LSEG. Organic revenue growth of 1% matched expectations. Adjusted earnings per share in Q3 jumped 15% to $1.14, outpacing the LSEG consensus estimate of $1.05, thanks to ongoing cost optimizations, particularly at the gross margin level. Management raised the midpoint of full-year earnings guidance despite the continued in weakness in China that has been hampering top-line organic growth. GEHC YTD mountain GE Healthcare YTD We also like how 2025 is setting up for GEHC, with stimulus in China still working its way into the market, a newly approved drug used in radiology, Flyrcado, becoming commercially available, and indications of market share gains based on a readthrough from a competitor. We're bumping up our price target to $95 per share from $92 but keeping our 2 rating on the stock. Bottom Line Results were mixed, but it comes as no surprise that the quarter was negatively impacted by weakness in China. Excluding business in the world's second-largest economy, reported ex-China sales were up about 5%, with ex-China organic order growth up 4% versus the prior year. In the U.S., CEO Peter Arduini commented on the call that "strong orders and sales were driven by multiyear enterprise deals, primarily made up of imaging products, particularly PET and CT systems, which are critical to the diagnosis and treatment of chronic diseases. We are pleased with the progress that we're making to secure long-term partnerships, which is foundational to our growth strategy. Another revenue driver in the quarter was PDx [Pharmaceutical Diagnostics segment]. The team continues to deliver for customers and we've seen PDx reports seven quarters of high-single-digit or double-digit organic revenue growth." On China, Arduini added, "We continue to monitor the market, which has been slow to recover. Coordination of stimulus funding is taking longer, so customers are still delaying normal purchasing. This is impacting overall growth in the China market in the near term. Bottom line is we continue to view this as a temporary challenge and over the mid to long term, we see China as an attractive market." Despite the China headwind, management is taking in orders faster than they can deliver on them, resulting in a 1.04x book-bill ratio in the quarter (remember, anything above a ratio of 1 is a positive sign of future growth). As a result, the team exited the quarter with a $19.6 billion backlog, representing a $1.2 billion increase versus the year-ago period and a $600 million increase on a sequential basis. GE Healthcare Why we own it : GE Healthcare is the global leader in medical imaging, diagnostics, and digital solutions in health care. Its split from General Electric in 2023 enabled the now-standalone company to invest more aggressively in R & D, leading to new product innovations, especially in artificial intelligence. The combination of new, higher-priced products along with the optimization of its business post-split creates an underappreciated margin expansion story. The rollout of new Alzheimer's disease therapies is another longer-term tailwind. Competitors : Philips and Siemens Most recent buy : May 29, 2024 Initiated : May, 17, 2023 We're also looking forward to hearing more from management at the company's investor day event on Nov. 21. Among the topics in focus will be management's comments on Flyrcado, which is an injection PET radiotracer for enhanced diagnosis of coronary artery disease that was recently approved by the U.S. Food and Drug Administration. Management called it a game changer. On the call, Arduini said, "We estimate that there are around 6 million myocardial perfusion imaging procedures per year in the U.S., of which we believe PET MPI [myocardial perfusion imaging] makes up about 5% to 10%. Revenue will ramp over time, and we're working with health-care providers to build out the capacity required to enable greater access to PET for cardiology. We see an opportunity for revenues of greater than $500 million annually from this one proprietary molecule once the health system infrastructure is in place." Commentary In GE Healthcare's Imaging segment — home to products such as MRI and CT machines — quarterly revenue was down about 1% organic versus the year-ago period as ongoing weakness in China was only partially offset by growth in the U.S. That said, higher prices, efficiency gains and a favorable sales mix provided for a 200 basis point expansion in the segment's EBIT margin. "We continue to see strong demand, particularly in the US, with opportunities in replacements, upgrades and services," CFO James Saccaro said on the post-earnings conference call. Advanced Visualization Solutions segment — formerly Ultrasound — revenue in the third quarter was largely unchanged year-over-year as an increase in U.S. sales volume was entirely offset by weakness in China. The segment's earnings before interest and taxes (EBIT) margin contracted 190 basis points due to an unfavorable sales mix. Patient Care Solutions (PCS) segment — covering a range of medical devices like electrocardiogram machines and consumables used to take blood pressure readings, among others — saw sales increase 2% organically as management was able to increase production capacity and factory output rates and in turn work through the segment's backlog. Efficiency gains allowed for a 10-basis-point improvement in the segment's EBIT margin. Saccaro said on the call, "The team has reduced past due backlog throughout the year, driven by lean principles to increase capacity. These actions will allow for greater fulfillment flexibility in future quarters." Pharmaceutical Diagnostics (PDx) segment — used in radiology and nuclear medicine to deliver more precise diagnoses — was particularly strong, delivering segment revenue growth of 7% organically. EBIT margin for PDx improved 270 basis points driven by an increase in procedure volumes, price hikes and new product introductions. This is the unit that Flyrcado will be housed under. Guidance GEHC sees full-year organic revenue growth trending toward the lower end of the previously provided 1% to 2% range, with management citing "continued China market softness" as the main cause. The Street was looking for a 1.5% advance versus the prior year. On the other hand, the team raised the lower end of its full-year adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) target range, now targeting 15.8% to 16% versus a range of 15.7% to 16% previously, which compares to a 15.8% consensus estimate. Adjusted full-year EPS is now expected to be between $4.25 and $4.35, an increase on the low end from the prior range of $4.20 to $4.35 per share. That compares to a consensus estimate of $4.25. Free cash flow was reiterated at roughly $1.8 billion. (Jim Cramer's Charitable Trust is long GEHC. See here for a full list of the stocks.) 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GE Healthcare reported a mixed quarter before Wednesday's opening bell. While revenue slightly missed, an earnings beat along with a number of other positives pushed the stock higher.