Business Overview
GE Healthcare is the global leader in medical imaging, diagnostics, and digital solutions. The company operates in an $84 billion total addressable market that the company sees growing to around $100 billion by 2025 due to an aging population and increasing Medicare enrollment in the United States.
GEHC is one of the Big 3 in its field, the others being Siemens and Philips. Together, they account for about 60% to 70% of global market share. GE Healthcare serves over 1 billion patients worldwide and has an installed base of more than 4 million pieces of equipment. The company does about $18 billion in revenue annually, about half of which is recurring.
GE Healthcare operates four business segments: Imaging, Ultrasound, Patient Care Solutions, and Pharmaceutical Diagnostics.
Imaging is a $44 billion industry growing at a rate of about 4% to 6% over the next few years. This is GEHC’s largest segment, generating about $9.5 billion in revenue last year at a margin of around 13.1%. However, management thinks they can expand margins to the high teens over the next few years. GE Healthcare has leadership in nearly every market, with some of its key products being X-Rays, MRIs, CT scans, and women’s health machines that specialize in mammography and bone/metabolic health.
Ultrasound is a $12 billion industry growing at a rate of 4% to 7% over the next few years. GE Healthcare is a leader in this field with about 30% of global market share. Its business generated about $3.1 billion of revenue last year at a margin of 27.9%. One thing that’s great about this business is the need for machines to be refreshed. Typically, ultrasound machines need to be retired every five to seven years, so there is always an upgrade cycle happening here.
Patient Care Solutions is an $18 billion industry growing at a rate of 3% to 6%. GEHC’s business did about $3 billion in revenue last year at a margin of around 12.2%. But, management thinks they can expand margins to the high teens over the next few years. Some of the key product lines here are patient monitoring, anesthesia delivery and respiratory care, diagnostic cardiology, and maternal/infant care. GE Healthcare’s Patient Care Solutions take clinical data and transform them into real-time visualizations and clinical decision support in acute care, emergency room, operating room, and intensive care unit settings.
Pharmaceutical Diagnostics is a $10 billion industry growing at about 4% to 5%. GE Healthcare is one of the global leaders in Precision Diagnostics with an industry-leading injectable pharmaceutical portfolio in contrast media and molecular imaging. GEHC did about $2 billion in revenue last year at a segment margin of about 34.3%.
Catalyst:
Ever since the spin-out, the stock of GE Healthcare has been capped by performance in capital-intensive equipment sales. There has been weakness in China due to soggy economic conditions, and high interest rates in the US has been capping the financing and purchasing of equipments. Recent economic stimuli in China and the start of the Fed rate cutting cycle in September 2024 are expected to alleviate these underperforming sales activities.
One of the more interesting potential new market opportunities that lies ahead for GE Healthcare is in Alzheimer’s treatments. GE Healthcare is one of a few companies that offer a full suite of products and solutions to support patients. This includes PET scanners, which are used to confirm diagnosis, and MRI systems to monitor therapy. GEHC also has a diagnostic agent called Vizamyl, which is a tracer for amyloid-beta plaque detection and quantification (relevant in Alzheimer's disease). This is an example of a Pharmaceutical Diagnostic.
In Fall 2024, GE Healthcare's Flycardo was approved by the FDA for the detection of coronary artery disease. This product is set to launch is some US markets in early 2025. Wells Fargo analyst said Flycardo has peak annual sales potential of $1B and could boost EPS by 0.80 by 2028.
Price Target: $110
Let's look at some of GEHC's US-based competitors in the field such as Stryker or Abbott Laboratories. Stryker is trading at 24.8x 2025e EPS, with a 12% 2024-2025 EPS growth, or a 2x PEG. Abbott Lab is trading at 20.5x 2025e EPS, with a 10% 2024-2025 EPS growth, also a 2x PEG. If we apply an equivalent 2x PEG to GEHC, given a 2024-2025 EPS growth of 11.5%, we argue that a 23x PE multiple is very reasonable. Based on 2025e EPS of $4.76, applying a 23x PE multiple yields a $109.5 stock price.
We also performed a DCF analysis on FCF estimates to 2028, discounting with a 7.50% WACC, assuming 5% terminal growth. This analysis yielded a $115.34 fair stock price.