Break a bone, go for an X-ray. Mold in the lungs, go for an x-ray. Joint pain, go for an x-ray. X-Ray machines are arguably the most commonly used, and most taken for granted, medical diagnostic tools by the general public. Those x-ray machines, developed in 1896, were one of the earliest General Electric products that fostered the growth of GE Healthcare into a company with over four million installed devices across its four business segments – Imaging, Ultrasound, Patient Care Solutions, and Pharmaceutical Diagnostics.
COMPANY PROFILE
GE Healthcare was previously one of four fully owned divisions of General Electric (one of the oldest US industrial conglomerates) along with GE Power, GE Renewable Energy and GE Aviation.
In January 2023, the GE Healthcare division was ‘Spun Off’ into an independent company which generates $18B in annual revenue and has 51,000 employees across 160 countries.
81.1% of GE Healthcare shares were distributed to existing GE shareholders and 19.9% of shares retained by the GE corporation.
CHOOSING THE RIGHT STOCK
When considering an investment in any company, the Investment Thesis has to be considered within the context of three areas.
Best-In-Class
GE Healthcare is one of three big corporations within the diagnostics space. GEHC was 'spun off' as a company with an established customer base,
reputation, revenue stream and employee knowledge base and expertise.
Secular Growth Trend the global population is growing at a rapid rate with an increasing social focus on healthcare availability and equality for all. Healthcare spend is often a function of a countries Gross Domestic Product (GDP). As GDP's expand in developed countries, so too will health care. As emerging countries evolve into developed economies, social healthcare becomes a growth focus.
Strong Macroeconomic Environment a
s of August 2023, the US economy is strong and globally there are pockets of weakness. Healthcare is a social
function funded most often by governments or insurance with a small percentage of private. This makes the sector resilient to macroeconomic changes.
INVESTMENT THESIS
The Investment Thesis for GE Healthcare is founded on three pillars
1. RECURRING REVENUE STREAM - GEHC is a US based company in the worlds largest healthcare market with over 17.8% of Gross Domestic Product (GDP) spent on healthcare, nearly double the spend of the next closest country, Germany. GE Healthcare generates approximately $18 Billion in annual revenue, of which about half is considered ‘Recurring Revenue’. The company expects its addressable markets will expand from $81B in 2021 to $102B by 2025. This market expansion provides significant growth and recurring revenue opportunities.
2. GROWTH OPPORTUNITIES - Management expects profit margins to expand from 16% (2022) to 20% with annual compounded revenue growth of 4% to 6% across it’s four segments
Imaging - X-Rays, CT scans, mammography, bone health, MRI - total addressable market of approximately $44B expected to grow at 4-6%. GE Healthcare revenue (2022) in this segment was $9.5B with profit margins of 13%.
Ultrasound - Total addressable market $12B with an expected growth rate of 4-7%. GE Healthcare revenue (2022) in this segment was $3.1B with a profit margin of 27.9%. GEHC has approximately 30% of the global market share in Ultrasound.
Patient Care Solutions - transforms clinical data into the ‘support’ decision process in operating rooms, emergency and intensive care units with the companies key product lines such as maternity/infant care, diagnostic cardiology, anaesthesia delivery, respiratory care. Total addressable market $18B with a growth rate of 3-6%. GEHC generated approximately $3B (2022) in revenue from this segment with a 12.2% profit margin.
Pharmaceutical Diagnostics - uses injectable contrast media and molecular imaging. Total addressable market of $10B with expected growth rate of 4-5%. GEHC generated $2B in this segment with a profit margin of 34.3%. GEHC is the market leader in this area.
3. INDUSTRY TRANSFORMATION - Data Collection and AI - the future of healthcare is moving towards patient medical data collection such as imaging, lab, pathology, genomics and then layering that data with Artificial Intelligence to diagnose diseases and determine the best treatment. This strategy provides the best outcome for the patient and significantly reduces the costs to the healthcare system through diagnosis accuracy and qualification for treatment.
There are two other smaller contributors which support the Investment Thesis
DIVIDEND - GEHC provides a 3 cent per share dividend, which is not significant at this time, however that can be expected to grow which will qualify the stock for increasing ownership by large financial institutions and investment funds.
CATALYST - Alzheimers treatment - The US FDA is expected to provide drug approvals for Biogen’s Leqembi and Eli Lilly’s Donanemab for use in Alzheimers treatment. The current requirement for Leqembi is one initial MRI plus three additional MRI’s in the first year of drug use. GEHC provides the full range of diagnostics to determine qualification for this program including PET scanners (confirm diagnosis), MRI (monitoring treatment) and Vizamyl which is a pharmaceutical diagnostic agent for plaque detection. The FDA approval will require healthcare providers to add equipment for the diagnosis, monitoring and treatment.
RISKS
It’s important to understand the risks associated with any Trade or Investment Thesis
1. GE Corporations 19.9% ownership - GE will be looking to offload/sell its remaining share ownership in GEHC. This will create a ceiling of ‘supply’ or selling pressure which may limit upside reward or negatively affect the share price until GE has completed its share sale program.
2. Competition - GEHC is one of three competitors in the market. The other two being Siemens and Phillips. While the Total Addressable Market (TAM) can be expected to grow from $81B (2021) to $102B (2025), it will be a very competitive environment.
3. US Political Cycle - with $32T of US National Debt and 17.8% of US GDP spent on healthcare, the sector is often a political target for spending cuts in elections and budgets.
4. Broad Stock Market Moves - Healthcare is strategically used in Big Money Managers portfolio’s to reduce risk and volatility. In general this means that in market declines, healthcare will still decline, but less than the broader market (i.e. it will ‘outperform’ the market) and in broad market increases the stock price will increase, but not as much as the broader market (i.e. it will ‘underperform’ the market).
what does that mean at stockmarketHQ
Healthcare diagnosis and treatment are part of the foundation of a modern society which has grown from 6 Billion in 2000 to 8 Billion in 2022 and will continue to grow into the future. This population growth combined with continuously evolving disease discovery, treatments, data collection and artificial intelligence provides the long term foundation to the GE Healthcare Investment Thesis.
The risks affecting the stock price, including GE selling shares, competition, US politics and the broader stock market, are all external to the company and outside of managements strategy and don’t directly affect the demand environment for the companies products. However, those risks will cause short term swings in the stock price and position size should be managed to both capitalize on opportunities and protect against weakness.
Every stock within a portfolio has to fill a role in a diversified investment strategy with the goal of beating the benchmark S&P500 on the upside while balancing risk and reducing volatility to also beat ‘the market’ when it turns down.
Stocks like Nvidia, Meta and Tesla can have annual swings of 30-100% up and down. Big Money Managers will rotate out of these stocks in a 'Risk-off' environment and into safer more conservative stocks such as in the health sector.
GE Healthcare is one of three Best-in-Class companies in the diagnostics space, within the secular trend of an expanding population with an improving social healthcare focus which provides strong resilience to changes in the macroeconomic environment. GEHC should be considered as a candidate to fill the roles of balancing risk/reward and volatility within a portfolio or as a rotational stock in a 'risk off' market.
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