Doom and Gloom
I initiate my coverage of GE HealthCare Technologies Inc. (NASDAQ:GEHC) and rate shares a “Sell/Avoid” as I see no upside for the next 24 months, with shares priced at an undeserved premium while the company is facing significant competition resulting in market share losses. Meanwhile, management does not seem to acknowledge these issues and serves investors with overly ambitious financial targets.
GE Healthcare operates in a highly attractive and steadily growing medical devices industry. The company, recently spun off from General Electric, has a significant market cap of $32 billion but faces challenges in gaining substantial market share due to the industry’s fragmentation and the need for significant R&D spending.
The Imaging segment, which constitutes 54% of revenue, poses a concern as GE Healthcare struggles to maintain market share and faces technological challenges. The Ultrasound market, while contributing 17% to total revenue, sees the company losing ground to competitors due to increased competition and pricing pressures. However, the Patient Monitoring and Pharmaceutical Diagnostics segments present brighter prospects, with potential market share gains and growth outpacing industry forecasts.
Looking ahead, management’s ambitious growth and margin expansion targets may face headwinds, considering the industry dynamics, competition, and the need for increased R&D spending. The stock, currently trading at a P/E multiple of approximately 18x, appears overvalued compared to peers, leading to a cautious outlook.
In light of these factors and the lack of a compelling upside, I recommend a “Sell” rating for GE Healthcare stock. While shorting is not explicitly suggested, caution is advised, as the company’s growth outlook, competitive positioning, and stock valuation may not align with investors’ expectations over the next two years.
The medical devices industry remains highly attractive for conservative long-term investors.
The medical devices industry is a highly interesting and attractive one for investors. The industry has shown steady growth over many decades, and while it is not one of the fastest-growing industries and maybe not as exciting as many technology alternatives, it is incredibly steady and, above all, reliable due to the strong secular trends driving this industry and the fact that healthcare demand is something we see through every cycle, meaning the industry is as anti-cyclical and non-volatile as they come. Precisely what every conservative investor searches for.
Furthermore, whatever source you use, one thing all market research agencies agree on is that the healthcare industry outlook is not much different from what we have seen over the last decade, and this means that we can safely assume this to keep growing steadily in the mid-single digits from a market size of around half a trillion in 2022 to somewhere in the vicinity of $800 billion by 2030. These projections reflect the several global trends that drive demand for medical devices, such as the aging of the population, the growing middle class in emerging countries, and increasing demand for innovative new devices (like wearables) and services (like health data). This also reflects the changing health landscape with lifestyle and chronic diseases becoming more prevalent and the growing emphasis on early diagnosis and treatment, which leads to a growing number of patients undergoing surgical and diagnostic procedures as well as a higher need for self-monitoring equipment.
The expansion of the market is further propelled by the introduction of novel and advanced equipment. The surge in demand for cutting-edge therapies, coupled with technological progress in medical devices aimed at addressing unmet needs in the healthcare sector, stands out as a key driver for the anticipated growth of medical devices in the coming years.
Overall, this leads to a very reliably growing industry, supporting growth for its largest players. Therefore, taking into consideration the strong secular trends driving this growth in medical equipment so grows my interest in the manufacturers of this equipment, including the likes of Philips (PHG), Siemens Healthineers (OTCPK:SMMNY), and GE Healthcare.
In this article, I will focus on GE Healthcare or GEHC.
GE Healthcare – The basics
GE HealthCare is a global leader in medical technology, pharmaceutical diagnostics, and digital healthcare solutions, focusing on providing a wide range of medical technologies and services. The company operates as a leading global provider of healthcare solutions, offering products and services in areas such as medical imaging, diagnostics, patient monitoring, and pharmaceutical diagnostics.
Prior to this year, the company operated as a subsidiary of General Electric (GE) but was spun off at the start of 2023. It now trades on the Nasdaq as an individual company. Nevertheless, the company has a rich history, and with a market cap of $32 billion, GEHC is a leading player in the medical equipment market, operating alongside close peers Siemens Healthineers with a market cap of $63 billion and Philips at a market cap of just below $20 billion.
Still, despite its significant market cap and annual revenue of over $18 billion, the company only holds a minor market share in the industry, as the medical equipment industry is a highly fragmented one. We should keep in mind that it requires significant amounts of R&D spending and testing to bring medical devices to market, and with the sheer broadness of this industry, it is practically impossible to control a large share. Every company has its area of specialty, and even as GEHC spends over $1 billion in R&D annually and is a leader in its specific industries, it only accounts for a small piece of the entire market.
With revenue of $18.34 billion and a market size of $512 billion, we arrive at a market share of approximately 3.5% for GEHC, give or take. This makes the company the 7th largest in the industry in terms of revenue. For reference, the company has over 4 million medical devices installed globally, and with this incredible installed base, the company serves over 1 billion patients annually.
Furthermore, the company reports across four operating segments: Imaging, Ultrasound, Patient Care Solutions, and Pharmaceutical diagnostics. Management believes this gives it a TAM, which will grow to $100 billion by 2025, giving the company plenty of room for growth.
The most important and largest segment in terms of revenue for GEHC is Imaging, which accounts for 54% of revenue. The company produces a variety of medical imaging devices, including X-ray machines, magnetic resonance imaging (MRI) scanners, computed tomography (CT) scanners, ultrasound systems, and positron emission tomography (PET) scanners. In Medical Imaging, GEHC is the second largest in terms of market share, only trailing Siemens Health.
However, while being the company’s largest segment, medical imaging is actually one of the slower-growing verticals of the medical devices industry. The global medical imaging market is expected to grow at a CAGR of 4.8% through 2030, driven by the rising incidence of lifestyle-related diseases, a growing need for early detection tools, and advancements in technology aimed at enhancing turnaround times. This sits in line with management’s projected growth of 4-6% annually, indicating little change in market share. In addition, management believes it can expand its EBIT margin in imaging from a historical range of 10-13% to the high teens, which would be significant for EPS growth.
However, over the last few years, growth in the company’s imaging segment has been far from straightforward. GEHC seems to face challenges in competing in the high-end imaging market as it loses market share, making it hard to view management’s growth and margin goals as realistic. Crucial to understand is that GEHC has the broadest product portfolio in imaging of any of the top 5 vendors, but at the same time, there is no single clinical or product sector where it dominates or offers products of unique quality, but as an accomplished generalist, can meet the needs of a wide range of customers. However, in medical equipment or imaging in particular, this strategy does not seem to work out today.
On top of this, the company has struggled in recent years to integrate digital technologies into its imaging equipment and has fallen behind the competition in technological dominance. Citing Signify Research, one of the world’s largest intelligence providers to Healthcare leaders:
The vendor has held a large share of the market for a long time, but that share is slowly being eroded. Whether GE can stem this customer leakage is dependent on how well it can deliver on the newer, better-connected, data-driven facets of imaging IT.
Therefore, I am quite bearish on the company’s prospects here and actually view the imaging segment as a drag on the company’s growth potential, especially with this segment accounting for 54% of total revenue.
With GEHC heavily depending on this market to drive its growth, I am not too optimistic. Current R&D levels also cannot match that of peers, and I believe it will, therefore, require at least a few years of significant R&D spending for the company to strengthen its position in this market. Therefore, I expect GEHC to struggle to grow this segment in line with its goals over the next couple of years, as further market share losses are highly probable. As a result, I project a CAGR of closer to 2-5% for this segment.
In the Ultrasound market, GEHC leads with a 13% market share (17% of total revenue), followed closely by Siemens Health and Philips. GEHC produces a range of ultrasound equipment designed for medical imaging purposes. The company’s ultrasound technology is applied in various medical specialties, including obstetrics, gynecology, cardiology, and radiology. The ultrasound equipment is designed to provide detailed imaging for diagnostic purposes, allowing healthcare professionals to visualize and assess organ structures, blood flow, and abnormalities. GE Healthcare’s ultrasound offerings typically include a variety of system models with different features and capabilities to meet the diverse needs of healthcare providers and medical facilities.
Growth in ultrasound has been strong, and this segment also carries far higher margins in the 22-28% range, positively contributing to the company’s bottom line. And yet, the company is also struggling in this segment. Research by SkyQuest Technology Consulting shows that GEHC struggles in this market as it has been losing market share to rivals such as Philips and Siemens Health in recent years. On top of this, several new entrants into the market, such as Samsung and Hitachi, are offering competitive products at lower prices, putting further pressure on GEHC.
Suppose GEHC wants to stay competitive and put a stop to the market share losses. In that case, it will likely be forced to increase R&D to regain its technological dominance or sacrifice margins to undercut competitors on pricing. Either way, the company is facing financial headwinds, and as a result, I don’t view management growth goals as realistic here either.
Management aims to grow revenues of this segment at a CAGR of 4-7%. Meanwhile, SkyQuest Technology Consulting expects the ultrasound industry to grow at a CAGR of around 4.1% through 2028, indicating that management expects to outgrow the industry. While I very much hope it can turn recent trends around, I can’t see this happening anytime soon and therefore expect management to perform in line with the industry at best, projecting a revenue CAGR of 3% to 4.5%
Patient Monitoring and Pharmaceutical Diagnostics – Growth is looking better here
GEHC also has a strong presence in both the patient monitoring devices and Pharmaceutical Diagnostics markets. The company provides patient monitoring systems that enable healthcare professionals to monitor and track vital signs and other patient data in real-time. This helps continuously assess a patient’s health status, measuring factors like heart rate, blood pressure, respiratory rate, and oxygen saturation. The company’s offering also includes bedside monitoring and wearable monitoring devices.
The company currently holds the #2 position in this industry, trailing only Philips. The company has seen some market share gains in recent years following a shake-up of the industry due to the COVID-19 pandemic, which has driven some additional growth. GE Healthcare’s dominant global presence in core clinical markets, including anesthesia and diagnostic cardiology, also aided the company in increasing its share of the global clinical care device market overall.
Looking ahead, the company’s offering is looking strong. As Philips has been experiencing significant problems with its patient monitoring equipment in recent years, we could see GEHC take some additional market share from the industry leader due to the brand damage for Philips. Therefore, we could see GEHC outgrow the industry’s growth forecast.
Currently, the industry is expected to grow at a CAGR of 9.1% through 2027, making it one of the fastest-growing verticals in the entire healthcare equipment industry. This growth is driven by the increasing prevalence of chronic diseases, such as cardiovascular disorders, diabetes and respiratory conditions, the aging population, and ongoing advancements in technology, including the integration of wireless technologies, data analytics, and AI.
Meanwhile, management seems somewhat conservative here, projecting growth at a 3-6% CAGR through 2025. Management also sees room for margin expansion from a level of 10-12% in the last few years to the high teens, which is reasonable. However, I also expect faster growth at a 7-10% CAGR through 2030.
Finally, there is the Pharmaceutical Diagnostics segment. The company offers diagnostic solutions for various medical conditions, including laboratory diagnostics, molecular diagnostics, and point-of-care testing. This includes equipment and technologies for clinical chemistry, immunoassay, hematology, and microbiology. In addition, GE Healthcare is involved in developing and manufacturing tools and technologies used in life sciences research and biopharmaceutical manufacturing. This includes equipment for cell culture, protein purification, and bioprocessing.
This segment is another one with a stronger EBIT margin, sitting in the low 30s. Furthermore, growth has been stable recently, and the company is performing well. Therefore, the 4-5% CAGR targeted by management should be achievable, although this could end up slightly higher depending on market dynamics. Note that this segment only accounts for 12% of revenue as of the most recent quarter.
GEHC should be able to boost growth with its lead in AI integrations
Across the product portfolio, GEHC management aims to boost growth by focusing on investing in AI integrations and digital solutions, in addition to the obvious focus on introducing new and more innovative products. For reference, 35% of orders today are derived from products introduced after 2021.
Positively, in terms of AI innovation, GEHC is ahead of