Healthcare Sector Ideas

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>>> Why Shares in GE HealthCare Technologies Soared in December


Motley Fool

By Lee Samaha

Jan 5, 2024


https://www.fool.com/investing/2024/01/05/why-shares-in-ge-healthcare-technologies-soared-in/


KEY POINTS

Management's plans to expand profit margins were boosted by its ongoing success at launching new products.

The stock remains an excellent option for investors looking for healthcare exposure in their portfolio.

New product introductions encourage investors to believe this healthcare stock is headed for greatness.

Shares in healthcare technology company GE Healthcare (GEHC) rose by an impressive 12.9% in December, according to data provided by S&P Global Market Intelligence.

While cyclical companies did very well in December due to lower market interest rates, GE Healthcare's outperformance comes down to stock-specific news relating to its key earnings driver. In other words, management aims to improve its profit margins while growing revenue at a mid-single-digit rate.

How GE Healthcare plans to expand profit margins

Following the spin-off from General Electric in early 2023, management has taken many routes to expand profitability. They include taking a more focused approach to pricing and "product platforming" (developing products that work off a common platform), investing in products powered by artificial intelligence (AI), and enhancing its software mix.

In addition, GE Healthcare has a significant opportunity in the growing field of theranostics (using agents to deliver drugs to precise areas), not least because it manufactures the agents used to diagnose, monitor, and guide drug delivery and the high-ticket imaging equipment.

New product introductions

However, I digress. The key to the move in December is probably the biggest driver of GE Healthcare's long-term margin expansion and growth plans, namely new product introductions (NPI). NPIs not only drive demand growth but also tend to come with higher margins. GE Healthcare released 40 NPI at the Radiological Society of North America (RSNA) annual meeting in 2022, and it was a similar story recently, with more than 40 products released at RNSA in late November 2023.

These included theranostics tools, AI, and deep learning solutions, including AI-enabled ultrasound solutions, imaging technology, and scanners.

By keeping up the constant pace of NPI launches, GE Healthcare can take full advantage of its new-found independence from GE and improve profitability and cash-flow generation from earnings.

A stock to buy for 2024?

NPI growth is essential because GE Healthcare suffered margin erosion in making investments to generate them in 2023. Still, the company is on track to expand its comparable earnings before interest and taxes (EBIT) margin from 14.5% in 2022 to 15%-15.5% in 2023. Management believes it can hit a high-teens to 20% EBIT margin over the medium term.

As such, GE Healthcare remains an excellent option for investors looking for a high-quality healthcare stock with solid top-line growth prospects married with margin expansion and profit growth.

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