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We're hiking our GEHC price target, looking beyond a mixed quarter to next year's catalysts

Harsh — Wed, 30 Oct 2024 17:55:36 +0000

GE Healthcare reported a mixed quarter before Wednesday’s opening bell. While revenue slightly missed, an earnings beat along with a number of other positives pushed the stock higher. Revenue rose just under 1% year over year to $4.86 billion in the third quarter, just short the $4.87 billion expected, according to analyst estimates compiled by LSEG. Organic revenue growth of 1% matched expectations. Adjusted earnings per share in Q3 jumped 15% to $1.14, outpacing the LSEG consensus estimate of $1.05, thanks to ongoing cost optimizations, particularly at the gross margin level. Management raised the midpoint of full-year earnings guidance despite the continued in weakness in China that has been hampering top-line organic growth. GEHC YTD mountain GE Healthcare YTD We also like how 2025 is setting up for GEHC, with stimulus in China still working its way into the market, a newly approved drug used in radiology, Flyrcado, becoming commercially available, and indications of market share gains based on a readthrough from a competitor. We’re bumping up our price target to $95 per share from $92 but keeping our 2 rating on the stock. Bottom Line Results were mixed, but it comes as no surprise that the quarter was negatively impacted by weakness in China. Excluding business in the world’s second-largest economy, reported ex-China sales were up about 5%, with ex-China organic order growth up 4% versus the prior year. In the U.S., CEO Peter Arduini commented on the call that “strong orders and sales were driven by multiyear enterprise deals, primarily made up of imaging products, particularly PET and CT systems, which are critical to the diagnosis and treatment of chronic diseases. We are pleased with the progress that we’re making to secure long-term partnerships, which is foundational to our growth strategy. Another revenue driver in the quarter was PDx [Pharmaceutical Diagnostics segment]. The team continues to deliver for customers and we’ve seen PDx reports seven quarters of high-single-digit or double-digit organic revenue growth.” On China, Arduini added, “We continue to monitor the market, which has been slow to recover. Coordination of stimulus funding is taking longer, so customers are still delaying normal purchasing. This is impacting overall growth in the China market in the near term. Bottom line is we continue to view this as a temporary challenge and over the mid to long term, we see China as an attractive market.” Despite the China headwind, management is taking in orders faster than they can deliver on them, resulting in a 1.04x book-bill ratio in the quarter (remember, anything above a ratio of 1 is a positive sign of future growth). As a result, the team exited the quarter with a $19.6 billion backlog, representing a $1.2 billion increase versus the year-ago period and a $600 million increase on a sequential basis. GE Healthcare Why we own it : GE Healthcare is the global leader in medical imaging, diagnostics, and digital solutions in health care. Its split from General Electric in 2023 enabled the now-standalone company to invest more aggressively in R & D, leading to new product innovations, especially in artificial intelligence. The combination of new, higher-priced products along with the optimization of its business post-split creates an underappreciated margin expansion story. The rollout of new Alzheimer’s disease therapies is another longer-term tailwind. Competitors : Philips and Siemens Most recent buy : May 29, 2024 Initiated : May, 17, 2023 We’re also looking forward to hearing more from management at the company’s investor day event on Nov. 21. Among the topics in focus will be management’s comments on Flyrcado, which is an injection PET radiotracer for enhanced diagnosis of coronary artery disease that was recently approved by the U.S. Food and Drug Administration. Management called it a game changer. On the call, Arduini said, “We estimate that there are around 6 million myocardial perfusion imaging procedures per year in the U.S., of which we believe PET MPI [myocardial perfusion imaging] makes up about 5% to 10%. Revenue will ramp over time, and we’re working with health-care providers to build out the capacity required to enable greater access to PET for cardiology. We see an opportunity for revenues of greater than $500 million annually from this one proprietary molecule once the health system infrastructure is in place.” Commentary In GE Healthcare’s Imaging segment — home to products such as MRI and CT machines — quarterly revenue was down about 1% organic versus the year-ago period as ongoing weakness in China was only partially offset by growth in the U.S. That said, higher prices, efficiency gains and a favorable sales mix provided for a 200 basis point expansion in the segment’s EBIT margin. “We continue to see strong demand, particularly in the US, with opportunities in replacements, upgrades and services,” CFO James Saccaro said on the post-earnings conference call. Advanced Visualization Solutions segment — formerly Ultrasound — revenue in the third quarter was largely unchanged year-over-year as an increase in U.S. sales volume was entirely offset by weakness in China. The segment’s earnings before interest and taxes (EBIT) margin contracted 190 basis points due to an unfavorable sales mix. Patient Care Solutions (PCS) segment — covering a range of medical devices like electrocardiogram machines and consumables used to take blood pressure readings, among others — saw sales increase 2% organically as management was able to increase production capacity and factory output rates and in turn work through the segment’s backlog. Efficiency gains allowed for a 10-basis-point improvement in the segment’s EBIT margin. Saccaro said on the call, “The team has reduced past due backlog throughout the year, driven by lean principles to increase capacity. These actions will allow for greater fulfillment flexibility in future quarters.” Pharmaceutical Diagnostics (PDx) segment — used in radiology and nuclear medicine to deliver more precise diagnoses — was particularly strong, delivering segment revenue growth of 7% organically. EBIT margin for PDx improved 270 basis points driven by an increase in procedure volumes, price hikes and new product introductions. This is the unit that Flyrcado will be housed under. Guidance GEHC sees full-year organic revenue growth trending toward the lower end of the previously provided 1% to 2% range, with management citing “continued China market softness” as the main cause. The Street was looking for a 1.5% advance versus the prior year. On the other hand, the team raised the lower end of its full-year adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) target range, now targeting 15.8% to 16% versus a range of 15.7% to 16% previously, which compares to a 15.8% consensus estimate. Adjusted full-year EPS is now expected to be between $4.25 and $4.35, an increase on the low end from the prior range of $4.20 to $4.35 per share. That compares to a consensus estimate of $4.25. Free cash flow was reiterated at roughly $1.8 billion. (Jim Cramer’s Charitable Trust is long GEHC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

An examination with a CT scanner is prepared in the emergency room of the university hospital (UKJ) in Jena, Germany. The GE Healthcare scanner is called the Revolution CT.

Martin Schutt | picture alliance | Getty Images

GE Healthcare reported a mixed quarter before Wednesday’s opening bell. While revenue slightly missed, an earnings beat along with a number of other positives pushed the stock higher.

Danaher returns a key business to growth, and we're raising our stock rating back to buy

Harsh — Tue, 22 Oct 2024 19:17:30 +0000

Danaher shares declined Tuesday despite the life sciences company returning its key bioprocessing business to growth in the third quarter. Danaher’s revenue for the three months ended Sept. 27 advanced 3% year over year on a reported basis, to $5.8 billion, outpacing the LSEG consensus estimate of $5.59 billion. On an organic basis, sales were up 0.5%. Adjusted earnings per share decreased 0.6% annually to $1.71 but still topped the $1.57 per share that had been expected. DHR YTD mountain Danaher YTD The stock dropped 4% as investors questioned the sustainability and magnitude of bioprocessing improvements in 2025. Wall Street’s reaction does not reflect the strides Danaher made in that important end-market, which is contained in the company’s biotechnology segment. Some of Tuesday’s weakness could also be attributed to profit-taking since Danaher shares jumped on last week’s solid results from German life sciences peer Sartorius. Bioprocessing is the use of cell components to make a variety of products including targeted therapies. Danaher is a leader in products and services that support health- care research and development. Bottom line Danaher’s stock move lower presents a buying opportunity, and we’re upgrading it to our buy-equivalent 1 rating and increasing our price target to $305 per share from $295. With the long-running destocking headwind abating, demand from larger bioprocessing customers improved. Bioprocessing in China, however, remained suppressed. Management said a recovery there may take “more time to play out” in the near term. In addition to better-than-expected biotechnology sales, Danaher’s life sciences and diagnostics segments were also strong. Danaher Why we own it : Danaher is a best-in-class life sciences and diagnostics company, with a management team who have proven time and again their ability to find new ways to grow. We expect to see a turn in bioprocessing-related orders this year as biotech funding comes back online and larger customers wind down efforts to flush out excess Covid-era inventory. Competitors : Sartorius and Thermo Fisher Scientific Weight in portfolio : 4.6% Most recent buy : July 2, 2024 Initiated : Jan. 3, 2022 Free cash flow was better than expected at $1.23 billion, representing nearly 12% growth versus the year-ago period. The company also achieved a free cash flow to net income conversion ratio of 150%. Year to date, that ratio stands at 135%. That means its earnings are fully backed by cash, and then some, and are higher quality than profits without an equal or greater amount of cash in hand. During the third quarter, management repurchased about 2.6 million shares. Commentary Biotechnology segment sales in Q3 dipped 0.7% on a core basis to $1.65 billion but exceeded estimates. Bioprocessing realized low-single-digit growth in the quarter. Bioprocessing has been under pressure in recent quarters due to a lack of funding for smaller businesses after the collapse of Silicon Valley Bank in early 2023 and destocking from larger customers coming out of the Covid pandemic. On the post-earnings call, Danaher CEO Rainer Blair said, “We’re not seeing the same level of [large customer] improvement in underlying performance from our smaller customers. Despite a modest improvement in the [biotech] funding environment, they continue to rationalize their therapeutic programs and remain cautious with their investments.” Life sciences segment sales were better than expected but still dipped 2% on a core basis to $1.78 billion. China remained a headwind, with Blair saying on the call that “announced stimulus measures in China have not yet translated into meaningful order activity as customers are still awaiting details on the implementation of these programs.” Outside of China, demand is still somewhat muted but expected to improve. Diagnostics segment sales advanced 5% on a core basis to $2.36 billion and beat estimates. At subsidiary Cepheid, which handles molecular diagnostics, the team highlighted “broad-based strength” in both the respiratory and non-respiratory parts of the business. Respiratory revenue of $425 million more than doubled management’s expectations due to higher volumes and a favorable mix of its 4-in-1 test for Covid-19, Flu A, Flu B, and respiratory syncytial virus (RSV). Guidance For the current quarter, the fourth of fiscal 2024, Danaher expects a revenue decline in the low single digits versus last year, on a core basis. That’s a miss. Expectations were for an increase of 2.6%, according to FactSet. For the full year, management’s forecast was unchanged. The team expects total sales to decline by low single digits compared to expectations for a decline of 0.5%. (Jim Cramer’s Charitable Trust is long DHR. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

In this photo illustration, a Danaher Corporation logo seen displayed on a tablet.

Igor Golovnov | SOPA Images | Lightrocket | Getty Images

Danaher shares declined Tuesday despite the life sciences company returning its key bioprocessing business to growth in the third quarter.

Embattled Abbott Labs comes through with a strong quarter, buyback announcement

Harsh — Wed, 16 Oct 2024 16:23:28 +0000

Medical device maker Abbott Laboratories on Wednesday delivered better-than-expected quarterly results and upped its earnings guidance for the third straight quarter. Shares rose more than 1%, shaking off an initially subdued reaction. Revenue in the three months ended Sept. 30 rose 4.9% to $10.64 billion, topping estimates of $10.55 billion, according to data provider LSEG. Organic sales, which exclude Covid testing, were up 8.2% from the year-ago period. It’s unclear whether analyst estimates are comparable. Adjusted earnings per share (EPS) of $1.21 beat LSEG expectations by a penny and increased 6.14% on an annual basis. ABT YTD mountain Abbott Labs’ year-to-date stock performance. Abbott shares are extending their period of outperformance versus the market and health-care peers. The stock entered Wednesday’s session up a little more than 10% since the July 26 close — after the closing bell that day, the company was ordered to pay $495 million in damages in a court case over its premature infant formula, which has been a major overhang on the stock since mid-March. That advance is ahead of the S & P 500 , a closely followed health-care exchange-traded fund , which gained 6.5% and 1.9%, respectively, over the same stretch. Bottom line In its third quarter, Abbott Labs demonstrated why we wanted to stick with the stock in the face of legal battles that emerged earlier this year and spooked investors. We’re reiterating our price target of $130 and 2 rating, meaning we’d wait for a pullback before adding to our position. At its lows of 2024 in July, Abbott’s market cap stood at $174.1 billion, roughly $32 billion below where it was in March before its competitor in the premature infant formula market lost a court case and put Abbott’s own case load in the spotlight. We battled the stock in the months that followed, arguing the selling was overblown, especially considering the scientific community backed Abbott’s view that the formulas were medically necessary for premature infants and did not cause an intestinal illness commonly abbreviated as NEC. A trio of U.S. agencies earlier this month threw more support behind use of the formulas . At its highs of Wednesday’s session, Abbott had clawed back all of its market cap losses since March 14. “Abbott really came through,” Jim Cramer said Wednesday. “There’s just a lot to like with the Abbott quarter.” Commentary The place to start is Abbott’s medical devices segment, which saw a roughly 12% increase in revenues to a better-than-expected $4.75 billion, as seen in the chart below. On an organic basis, which strips out the impact of foreign exchange fluctuations and divestitures, medical device sales rose 13.3%. It’s nice when a company’s largest segment by sales is the one with the fastest growth rate — and that’s the case with Abbott. FreeStyle Libre, a continuous glucose monitor (CGM) for people with diabetes, continued its impressive growth in the quarter, with organic sales up 21%, a slight acceleration from the prior three-month period. While Abbott has benefited from the struggles of CGM competitor Dexcom , CEO Robert Ford maintained an upbeat view on the market in the near and long terms. “This is a mass market opportunity that we have,” he said, noting there’s about 10 million CGM users worldwide right now but over 100 million diabetics in developed countries. Abbott and its peers are increasingly targeting CGMs to non-diabetics, hoping that health-conscious people would want to use biosensors to learn about their body’s response to factors like food, stress and exercise. Abbott launched its over-the-counter CGM called Lingo in the U.S. in early September , and Ford said the product is “off to a very good start.” People can purchase a one-sensor pack for $49, two for $89 or six for $249. The two-sensor pack is the most popular version, he said. The sensors last about two weeks, and Ford said he was positively surprised by the reorder rates so far. Abbott has targeted $10 billion in sales of CGMs by 2028, and Lingo represents a “great opportunity” to add to that goal over time, Ford said. Another highlight: Abbott Labs announced its board authorized a new $7 billion share purchase program. Its prior authorization from 2021 was getting low, Ford said. In the third quarter, Abbott bought back $750 million worth of stock, with Ford saying executives believed there was a disconnect between the stock’s valuation and the company’s business fundamentals. Indeed, Abbott usually prioritizes investing in its product pipeline over share repurchases, so the fact that management stepped up its buyback program really shows how they feel about the current stock price. Abbott’s nutrition business — home to brands such as Ensure protein powder and PediaSure drinks for kids — was a weak spot, just as it was in the second quarter. Sales were down about 0.3% year over year to $2.07 billion, short of the $2.17 billion expected by analysts, according to FactSet. On an organic basis, revenue was up 3.4% in the segment. Ford said the international pediatric business was the biggest drag on nutrition in the quarter, blaming that on Abbott’s own “commercial execution” early in the quarter. The company quickly recognized the softness and took steps to fix it, Ford said, including personnel changes followed by inventory adjustments to distributors. Ford said early indications show that Abbott took the right corrective actions and that growth in that division and the segment overall should improve in the current quarter. On the lawsuits, specifically, Ford once again issued a strong defense of the premature infant formula. He said the statement from the three U.S. health agencies — the Food and Drug Administration, Centers for Disease Control and Prevention, and National Institutes of Health — “says a lot.” “It was a very strong statement,” Ford said, though he noted that the judge in an ongoing trial in Missouri has yet to allow it to be submitted as evidence in the case. He said he expects that in future cases, the statement and an accompanying report on NEC and formulas will be included as evidence for juries to consider. Abbott’s recent stock performance suggests investors are getting more comfortable with the litigation risk, but it’s still too early to declare complete victory. That’s why we’re generally holding off on adding to our position. Nevertheless, there’s little doubt about the strength of Abbott’s underlying fundamentals. In due time that should occupy more and more of the spotlight. Abbott Laboratories Why we own it : Abbott is a high-quality medtech company growing at a fast clip. The stock has been dealing with two overhangs: falling Covid testing sales and concerns that GLP-1 adoption will disrupt its leading continuous glucose monitor. As Abbott’s organic sales growth continues to shine, the market will realize both concerns are overblown. Competitors : Dexcom and Edwards Lifesciences Weight in Club portfolio : 2.89% Most recent buy : 5/29/2024 Initiated : Jan. 29, 2024 Guidance Abbott Labs now projects adjusted EPS in the range of $4.64 to $4.70, which at the midpoint is up a penny versus its prior guidance of $4.61 to $4.71. It’s the third consecutive quarter that Abbott has upped the middle of its EPS forecast. The company reiterated its full-year organic sales growth outlook of 9.5% to 10%. (Jim Cramer’s Charitable Trust is long ABT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Attendees walk by the Abbott booth during CES 2024 at the Las Vegas Convention Center on January 10, 2024 in Las Vegas, Nevada.

Ethan Miller | Getty Images