This Wide-Moat Stock Is Still a Buy Even After Recent Rally

Spun out from General Electric in early 2023, GE HealthCare is a top-three global leader in medical imaging. We think the company has carved out a wide economic moat as it benefits from high barriers to entry in its industry and secular growth drivers that include an aging population. We believe its stand-alone status will allow management to focus more on research and development and thereby maintain the company’s competitive position. Although the shares have rallied since early July, they still look 13% undervalued relative to our $98 fair value estimate.

GE HealthCare is positioned to benefit from long-term healthcare trends, including an aging population, growing demand for early detection and monitoring of cancer and other diseases, and increasing use of minimally invasive and noninvasive procedures. GEHC, Siemens Healthineers, and Philips control about 70% of the medical imaging market. They largely compete by improving their technology and features rather than on price. Like its peers, GEHC has invested heavily over many decades to build a comprehensive product portfolio and extensive 24-hour servicing networks, which are crucial for selling to big hospitals and health networks. Its large installed base also facilitates sales of software platforms and multiyear servicing contracts that entrench GEHC in healthcare providers’ workflows. Unlike its peers, GEHC is also a major player in pharmaceutical diagnostics, which has attractive returns and potential upside with respect to the fast-growing theranostics market.

Key Morningstar Metrics for GE HealthCare

• Fair Value Estimate: $98
• Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Uncertainty Rating: Medium

Economic Moat Rating

GE HealthCare’s wide economic moat is based primarily on intangible assets and switching costs in the imaging and ultrasound segments, which constitute more than 70% of total revenue. Intangible assets include GEHC’s comprehensive catalog of cutting-edge products and extensive servicing networks. Switching costs primarily consist of integration of its hardware and software ecosystems into hospital workflows and servicing contracts for long-lived capital equipment. The pharmaceutical diagnostics segment also has intangibles and switching costs; it has built out an extensive global supply chain and boasts a decadeslong record of high quality and stable supply. The company’s competitive advantages are tied to its scale and integration into healthcare systems, and we think it would be very hard to displace GEHC within 20 years.

Read more about GE HealthCare’s moat rating.

Fair Value Estimate for GE HealthCare Stock

Our fair value estimate is $98 per share. Over our five-year explicit forecast period, we project revenue to grow in the midsingle digits, in line with the economic growth and healthcare spending growth that we project for the territories GEHC sells into. We project operating profit margin to rise from 12.5% in 2023 to the mid- to high teens. This is due to improving gross profit from product mix shifts and lower selling, general, and administration expense as management optimizes its cost structure as a stand-alone company. After that, for our 15-year stage two forecast period, we project normalized earnings growth in the low single digits. We subtract the company’s unfunded pension liabilities, which were $4.6 billion at the end of 2023, from our enterprise value. We assume a weighted average cost of capital of 6.7%.

Read more about GE HealthCare’s fair value estimate.

Risk and Uncertainty

Demand for medical imaging could be constrained by ongoing pricing pressure as payers look to push down reimbursement levels. Disruptive or low-cost rivals could become more competitive in the US and Europe. GEHC’s China business will likely see greater competition from local suppliers; we expect that the government’s policy to replace foreign suppliers with local suppliers where possible will likely reduce the market share of multinational companies over time. GEHC’s imaging segment depends on hospital capital spending, which would be hurt by a macroeconomic downturn. A prolonged increase in interest rates will adversely affect debt and pension obligations and also possibly demand for equipment, as some end users need to borrow to make capital purchases.

Read more about GE HealthCare’s risk and uncertainty.

GE HealthCare Bulls Say

• Now that it has been spun off, GEHC can focus on R&D and operational efficiency without competing internally with GE’s other business lines.
• Medical imaging has high barriers to entry and long-term secular growth drivers, including an aging population, greater demand for screening and surveillance, and increasing use of minimally invasive or noninvasive procedures.
• Unlike its peers, GEHC is a major player in the pharmaceutical diagnostics market, which has high barriers to entry, attractive returns, and potential upside in theranostics.

GE HealthCare Bears Say

• GEHC does not have a long record of operating as a stand-alone company.
• The China business is likely to see increasing competition from local companies over time.
• Rising interest rates would affect demand for GEHC’s capital equipment as well as the company’s underfunded pension obligations and debt refinancing rates.

This article was compiled by Susan Dziubinski and Sylvia Hauser.