GE HealthCare Technologies

GE HealthCare's year-on-year revenue growth this quarter was 3.5% and adjusted EBIT margin was 14.2% (40 basis points lower than the prior-year period). Management reaffirmed full-year guidance ranges of 3.0% to 4.0% organic revenue growth and 15.4%-15.7% adjusted EBIT margin. Shares are up 11%.

Why it matters: The book/bill ratio was 1.15, a historical high, and the company's backlog grew 10% sequentially to $23.9 billion, which supports an optimistic outlook for near-term revenue growth and margin expansion. The disappointing decline in adjusted EBIT margin was due to poor performance in patient care solutions (negative 3% adjusted EBIT margin) on top of the expected inflationary pressures from memory chips, oil, freight, and other components. Advanced imaging solutions and pharmaceutical diagnostics grew 8% and 15%%, respectively, and reported 90 basis points and 30 basis points of margin improvement, which we find encouraging.

The bottom line: We maintain our fair value estimate for wide-moat GEHC of $88 per share. After July 29's rally, shares are trading in 4-star territory, and we continue to view them as undervalued, with the market not yet fully reflecting management's steady progress on margin improvement. Most of GEHC's mitigation measures this year are limited to finding alternative modes of freight and organizational cost optimization. However, if the inflationary pressures continue next year, GEHC should be able to increase prices to offset them more effectively. Management is working to turn around the patient care solutions, which contributed 7% of firmwide EBIT in 2025 but has experienced revenue decline for four straight quarters. We think management is also considering the possibility of divesting this unit, which we would welcome.

We are keeping our fair value estimate at $88 per share.

During our five-year explicit forecast period, we project revenue to grow in the low to mid-single digits. To account for the uncertainty posed by recent trade tensions between the US and the rest of the world, this is slightly below our assumptions for economic and healthcare spending growth in the territories where GEHC sells.

We project EBIT margin to rise from 14.2% in 2025 to 15.7% by 2030. Gross profit margin has been improving due to product mix shifts, and management has made progress in lowering operating expenses and optimizing its cost structure after its spinout. However, starting in 2026, GEHC has faced inflationary pressure on freight and input costs, so we have toned down our expectations of profit margin improvement.

For our 15-year stage two forecast period, we project normalized earnings growth of low single digits, in line with our projections for economic growth and healthcare spending growth in the territories that GEHC sells into.

We subtract the company's unfunded pension liabilities, which were $4.4 billion at the end of 2025, from our enterprise value.

We assume a weighted average cost of capital of 6.7%.

We award a Wide Morningstar Economic Moat Rating to GE HealthCare based primarily on intangible assets and switching costs in its imaging and ultrasound segments, which constitute over 70% of total revenue. Intangible assets include GEHC’s comprehensive product catalogue of cutting-edge products and extensive servicing networks. Switching costs primarily consist of the integration of its hardware and software ecosystems into hospital workflows and servicing contracts for long-lived capital equipment. Across its segments, its competitive advantages are tied to its scale and integration into healthcare systems, and we think it would be very hard to displace GEHC in these businesses within 20 years.

The advanced imaging solutions segment (about 60% of revenue) sells medical imaging equipment based on various technologies, including X-ray, computed tomography, magnetic resonance imaging, molecular imaging, and ultrasound. It also includes procedural guidance systems. These machines are used in a large number of medical procedures across therapeutic areas. The expensive technologies like CT, MRI, MI, and procedural guidance machines tend to be purchased by hospitals, provider networks, imaging centers, and surgical centers with sufficient patient flow to support owning such high-cost equipment. GEHC also sells servicing contracts and digital solutions. It is a top-three global player along with Siemens Healthineers and Philips, and we see a strong moat in this business.

Medical imaging and procedural guidance equipment requires precision engineering and extensive research and development to stay at the cutting edge. Only a handful of players are large enough to offer a comprehensive product catalogue that is competitive across all major imaging modalities. Each of the three largest players spent $1 billion-$2 billion per year on R&D. We think the market is an oligopoly structure where the largest players compete on product features and innovations rather than outright price.

Having the necessary scale to be a one-stop shop is especially important for selling to larger purchasers such as hospitals and large healthcare networks, which we think is a sticky customer base. By offering a full suite of equipment and software, GEHC can integrate its products into hospital workflows and bundle products and services during negotiations. It is common for hospitals and provider networks to procure most of their imaging equipment from a single supplier and enter a servicing contract for maintenance and repair. Furthermore, they are reluctant to change their equipment and software vendors due to potential disruption of workflows.

GEHC has built out extensive global servicing networks, which provide an important source of recurring, high-margin revenue. We estimate its contribution could be in the context of 40% of segment revenue. Imaging equipment often has long lifecycles, and big-ticket equipment can be used for 10-15 years before being sold on the secondary market. It is important for imaging facilities that their equipment is always functional, as rescheduling procedures can hurt revenue and delay timely treatment. GEHC’s extensive network of field engineers enables it to offer 24-hour troubleshooting and repair services, adopting the razor-and-blade business model seen across the medical equipment and life sciences industry. Although servicing contracts are not captive and do not typically span the lifetime of the equipment, across the industry, we estimate approximately 70% of customers will contract with the same servicer as the equipment maker. For many purchasers with high patient flow, maximizing up time is perhaps even more important than upfront equipment costs. Combined with the oligopoly market structure and reluctance of larger purchasers to change vendors, we see long-lasting economic moats for advanced imaging solutions.

The patient care solutions segment (15% of revenue) consists of a wide variety of medical devices used in acute care, including surgery and patient monitoring settings. Although there are trace switching costs and intangibles scattered throughout the business, we do not think this segment warrants a moat, given lower profitability and the overall competitiveness of these markets.

The pharmaceutical diagnostics segment (14% of revenue) consists of various contrast media used in ultrasound, MRI, X-rays, angiography, and CT, and radiotracers used in MI (including positron emission tomography and single photon emission CT). We think this segment has strong moats backed by its reputation for stable supply and high-quality manufacturing processes. Contrast media constitute about 80% of this segment, and GEHC is a top player along with Bracco Diagnostics and Bayer. Although contrast media do not have a lot of product innovation and there is some degree of substitutability within the same class of contrast agent, it is a strictly regulated industry, so vendors must have stringent quality controls and pharmacovigilance. Furthermore, it is a mission-critical consumable for certain types of imaging and interventional procedures (including angiography), and any shortage or delay in supply can be detrimental to workflows.

Radiotracers constitute the remaining 20% of GEHC’s patient diagnostics segment, and it is currently a fragmented market. These diagnostic pharmaceuticals are radioactive and require additional care for logistics. Because of their short half-lives, doses are individually made to order for a scheduled PET exam and delivered via express to the administering provider. We believe that building out the infrastructure and track record for this segment is a significant barrier to entry. Growth drivers in this product category include Flyrcado (used in myocardial perfusion imaging to detect ischemia and infarction), Vizamyl (amyloid detection for Alzheimer's disease), and Cerianna (estrogen receptor imaging in breast cancer).

Now that it has been spun off, GEHC is able to 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 aging populations, greater demand for screening and surveillance, and increasing utilization 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 with respect to the theranostics market.

GEHC does not have a long record of operating as a stand-alone company.

GEHC’s China business will likely see increasing competition from local competitors over time.

The recent launch of generic Omnipaque could start to affect the patient diagnostics segment in 2026.