Service Agreements And Imaging Advances Will Ensure Future Business Consistency

Key Takeaways

• Strong backlog growth via service agreements indicates future revenue stability and margin predictability, enhancing business consistency.
  
• U.S. market strength in imaging, coupled with margin-improvement initiatives, supports revenue and margin expansion through economies of scale and cost productivity.
  
• Limited growth in China, dependency on US market, and challenges in cost productivity could strain GE HealthCare's revenue, margins, and financial resources.

Catalysts

Engages in the development, manufacture, and marketing of products, services, and complementary digital solutions used in the diagnosis, treatment, and monitoring of patients in the United States, Canada, and internationally.

• GE HealthCare's strong growth in backlog driven by multiyear service agreements is a catalyst for future revenue stability and margin predictability, due to the recurring nature of this business.
  
• The U.S. market's solid performance particularly in imaging products, notably PET and CT systems, enhances revenue growth potential and can drive margin expansion through economies of scale.
  
• Margin improvement initiatives such as variable cost productivity and cost-effective design changes indicate a focus on increasing net margins, supported by partnerships with suppliers to reduce material costs.
  
• Advanced innovation in theranostics, with new partnerships and FDA clearance for innovative tools, suggests future revenue growth from expanding applications in cancer diagnostics and treatment.
  
• The introduction of Flyrcado, an FDA-approved imaging tracer, and investment in new AI and cloud-based solutions is expected to boost revenue through new product lines and higher-margin service offerings.

GE HealthCare Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GE HealthCare Technologies's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.6% today to 11.2% in 3 years time.
• Analysts expect earnings to reach $2.5 billion (and earnings per share of $5.57) by about December 2027, up from $1.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.2x on those 2027 earnings, down from 21.6x today. This future PE is lower than the current PE for the US Medical Equipment industry at 36.0x.
• Analysts expect the number of shares outstanding to decline by 0.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.03%, as per the Simply Wall St company report.

GE HealthCare Technologies Future Earnings Per Share Growth

Risks

• GE HealthCare's organic revenue growth was only 1% in the third quarter, reflecting weakness in the China market, which has not recovered as expected due to slow coordination of stimulus funding. This market softness negatively impacts future revenue potential.
  
• With service revenue growth at just 2% and flat product revenue, the company's ability to drive growth through existing product lines may be limited without new and innovative offerings, potentially impacting future earnings.
  
• The company faces margin pressure due to challenges in cost productivity improvements and maintaining favorable product mix, as seen in the Advanced Visualization Solutions segment where margins decreased, which could affect net margins.
  
• Continued investment in R&D, though necessary, could strain financial resources if products under development do not meet market expectations or if the associated returns take longer to materialize, affecting net margins and earnings.
  
• Ongoing dependency on the U.S. market, with reliance on its current growth trajectory, poses risks due to potential market saturation or changes in healthcare spending, impacting overall revenue and profit forecasts.

Valuation

• The analysts have a consensus price target of $96.55 for GE HealthCare Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $110.0, and the most bearish reporting a price target of just $74.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $22.2 billion, earnings will come to $2.5 billion, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 7.0%.
• Given the current share price of $79.25, the analyst's price target of $96.55 is 17.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.