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Industrial conglomerate General Electric hosted an investor teach-in in Chicago at a medical conference on Monday. The company reviewed its health-care franchise in a post-biopharma world. GE is selling its biopharma business to Danaher for $21 billion. Now investors have to evaluate the growth and margin potential of what is left.

GE Healthcare is a large global medical device company, said division CFO Monish Patolawala at the event. $17 billion in revenue, midteen margins with strong free cash flow conversion, with good opportunity to continue organic growth and margin expansion while still delivering good free cash flow conversion.

GEs case for its division is health care is a good franchise with solid profitability and decent growth. Bearish analysts dont see it that way.

We come away from the GE Healthcare investor day with no change to our negative view, wrote J.P. Morgan analyst (and known GE bear) Stephen Tusa in a Tuesday research report. While we believe this is an OK asset that has some opportunity to be managed better, we were underwhelmed by [the] presentation.

In particular, Tusa believes low research and development spending is a problem for the division. That theme was picked up by another bearish analyst, Gordon Hasketts John Inch.

Siemens reps at the show expressed pride in the companys outsized R&D budget and new product development, wrote Inch, contrasting GEs R&D spending with its rival Siemens Healthineers (SHL.Germany). For instance, Siemens talked about Dual Source CT scanner which is a technology that Siemens invented years ago but that competitors are just introducing.

GE management pointed out that a larger portion of its health-care business is in servicesfixing the installed based of diagnostic products. That skews the R&D as a percentage of sales comparisons, according to the company.

RBC analyst Deane Dray likes the service business mix. We liked hearing that recurring revenues account for 45% of health cares mix, Dray wrote following the event. And leverage to ongoing trends such as digital [and artificial intelligence] solutions and demand for precision health, which helps tackle waste in the health care industry and improve the accuracy of diagnostics. GE management spent a lot of time laying out how computing power is helping health-care professionals save time and how new technologies create opportunities for personalized medicine.

Tusa and Inch both rate GE shares the equivalent of sell with $5 and $7 price targets, respectively. Dray, on the other hand, rates shares buy and has a $14 price target for the stock.

GEs Healthcare Investor day highlighted the companys diversified global health care portfolio, wrote Citigroup analyst Andrew Kaplowitz. He focused on the outlook for health care in his research report. Despite a lower organic growth [and operating profit] margin profile following the pending sale of BioPharma, [GE Healthcare] could remain well positioned to contribute to growth over time.

The biopharma business has higher margins than the rest of GE Healthcare, which sells large, heavy diagnostic equipment. Kaplowitz is another bull and rates GE shares the equivalent of Buy, with a $14 price target.

Credit Suisse analyst John Walsh sums up the divide between bulls and bears by taking a middle path. We think GE Healthcare management presented a credible growth plan that should be enhanced by margin expansion and greater [free cash flow generation], wrote Walsh, who rates shares Hold. He sees a decent franchise with upside for shareholders if management can improve profitability.

One thing GE management didnt address in Chicago was the potential for a future health-care initial public offering. That was the plan for the division before the biopharma units sale was announced. The $21 billion coming in from that sale eliminated the need to raise money by selling GE Healthcare shares to the public. Now analysts wonder if an IPO is still in the cards.

GE stock dropped Monday and is down again Tuesday, by about 2.7%. Any health-care disappointment or IPO uncertainty, however, isnt the likely culprit. More bad trade news has all industrial stocks lower. On Monday, President Donald Trump threatened tariffs on Brazil, Argentina, and France. Tuesday, he said he might wait until after the election to strike a trade deal with China.

For the year, GE shares are up about 50% year, far better than comparable gains of the S&P 500 index and Dow Jones Industrial Average over the same span.

Write to Al Root at allen.root@dowjones.com

See the original post:
GE Is Touting Its Health-Care Business, but It Isnt Helping the Stock - Barron's

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