GE Healthcare on Wednesday morning reported a mixed second quarter and shares initially moved sharply lower. The stock then reversed higher because the post-earnings call got underway. Management made it clear that they think that weakness in China is temporary and see many other levers available to grow earnings. Revenue advanced lower than 1% 12 months over 12 months to $4.84 billion, missing expectations of $4.87 billion, in keeping with 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 worldwide leader in medical imaging, diagnostics, and digital solutions in health care. Its split from General Electric in 2023 enabled the now-standalone company to speculate more aggressively in R & D, resulting in recent product innovations, especially in artificial intelligence. The mix of latest, higher-priced products together with the optimization of its business post-split creates an underappreciated margin expansion story. The rollout of latest Alzheimer’s disease therapies is one other longer-term tailwind. Competitors : Philips and Siemens Most up-to-date buy : Nov. 1, 2023 Initiated : May, 17, 2023 Bottom Line It was not one of the best showing from Club holding GE Healthcare. China was a key source of weakness within the quarter, and the first factor forcing management to downwardly revise its full-year organic growth outlook. Sorry to say, we weren’t surprised. We trimmed our GEHC position Tuesday after rival Philips reported their results and called out weakness in China. Economic stimulus from the Chinese government is anticipated to assist boost business. But the businesses have been slow in getting information concerning the package and have delayed orders. It’s early yet, however the team is hopeful concerning the growth potential in an amyloid agent utilized in imaging Alzheimer’s patients now that approval of Club name Eli Lilly ‘s Kisunla treatment joined Leqembi from Eisai and Biogen within the battle against the mind-robbing disease. Within the meantime, GE Healthcare management continues to execute at a high level on what they will control, and so they’re finding more ways to enhance efficiency and, in turn, profitability. That is why GEHC was in a position to flip from being down roughly 9% on the discharge to positive by the point the decision wrapped up. Shares were up nearly 4% in afternoon trading. We’re reiterating our “wait for a pullback” 2 rating and our $92-per-share price goal. GEHC YTD mountain GE Healthcare YTD Quarterly commentary Organic order growth was up 3%. Investors are likely to concentrate on orders because they’re indicative of customer demand. On the decision, management said China was a 3-percentage point headwind to growth, meaning global revenue, excluding the world’s second-largest economy, was up 4% and orders were up 6%. Despite the weakness in China, we got healthy earnings before interest and taxes (EBIT) margin expansion to a level above what the Street was in search of. That helped GEHC pump out an earnings beat despite the top-line miss. On the decision, the team noted that the expansion was driven by gross margin improvement thanks to higher productivity and price dynamics. We predict the corporate’s ability to expand margins is one in all the more underappreciated points of the GEHC investment thesis on Wall Street. One other measure of future demand is the backlog, which exited the second quarter at $19 billion, up from the $18.7 billion at the top of Q1. The corporate’s book-to-bill ratio, which is a measure of orders received relative to sales, was 1.06, up from 1.03 in the primary quarter and up from 1.04 within the second quarter of 2023. Anything above a ratio of 1 is a positive sign of future growth. It means more orders are coming in than revenue recorded. In GE Healthcare’s Imaging segment — home to products similar to MRI and CT machines — revenue was down nearly 1% in comparison with the year-ago period. (It was flat organically.) Imaging EBIT margin improved 40 basis points to 11%, through productivity and price improvements. Sequentially, the margin expanded 130 basis points because of higher volumes. Management said, “Latest product introductions are contributing to particular strength in U.S. product demand.” Ultrasound segment revenue dropped nearly 2%. It was down 1% organically. Ultrasound EBIT margin contracted 120 basis points to 21.6%, with management calling out China as the first source of weakness. Patient Care Solutions (PCS) sales increased fractionally. (They grew 1% organically.) The segment covers a spread of medical devices like electrocardiogram machines and consumables used to take blood pressure readings, amongst others. EBIT margin for PCS contracted 90 basis points to 10.1%. The corporate blamed the product mix. But productivity actions offset inflation. Pharmaceutical Diagnostics (PDx) — utilized in radiology and nuclear medicine to deliver more precise diagnoses — was particularly strong. Segment revenue grew 12.5%. (It grew 14% organically). EBIT margin for PDx improved 450 basis points to 31.2% on the back of improved sales volume, productivity, and pricing. On the decision, CFO Jay Saccaro said, “We’re encouraged by positive developments within the molecular imaging market. We saw a continued acceleration of Vizamyl doses delivered within the U.S. within the second quarter. These sales increased threefold.” Vizamyl is an amyloid imaging agent indicated for PET imaging of the brain that estimates the plaque density in adult patients with Alzheimer’s. Arduini added, “Vizamyl doses continued to grow within the second quarter within the U.S. With the recent FDA approval of donanemab, we anticipate even further uptake of our diagnostic amyloid PET agent. This continues to be a small contributor to sales growth but gives us optimism about its sales potential over the following few years.” Guidance GEHC updated its outlook for the rest of the 12 months, now predicting organic revenue growth of 1% to 2%, down from the “roughly 4%” forecast previously provided, and below the three.4% the Street was in search of. On the decision, management blamed the prolonged weakness in China, with CEO Peter Arduini saying the corporate “previously communicated that the region would experience negative sales growth in the primary half as we faced a difficult compare.” He continued, “On the time, we expected positive sales growth within the second half. Today, the prolonged timing of the rollout of the brand new [Chinese] stimulus announced earlier this 12 months is impacting timing of orders and sales. We expect a continued sales decline in China year-over-year within the second half. And we anticipate growth in China might be negative for the 12 months. Because of this, we’re lowering our total company full-year organic revenue growth guidance.” The adjusted EBIT margin outlook was nudged higher to a spread of 15.7% to 16% and above the 15.6% the Street was in search of, even on the low end. The team cited further progress being made on “productivity and optimization initiatives.” Management reaffirmed their outlook for the corporate’s adjusted effective tax rate of 23% to 25%, earnings per share of $4.20 to $4.35, and free money flow of roughly $1.8 billion. For the third quarter, the team expects organic revenue growth of about 1% and adjusted EBIT margin expansion “relatively similar” to the 57-basis-point growth in Q2. The Street has been modeling about 50 basis points of expansion. The team added that they “would expect year-over-year organic revenue growth and adjusted EBIT margin within the fourth quarter to be the best of the 12 months.” (Jim Cramer’s Charitable Trust is long GEHC, LLY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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GE Healthcare on Wednesday morning reported a mixed second quarter and shares initially moved sharply lower. The stock then reversed higher because the post-earnings call got underway.
