GE HealthCare Is Going Independent. This Is Where the Stock Should Trade.

Text size

To start 2023, investors will have a choice to invest in a brand new $18 billion company with some 50,000 energized employees and a plan to create shareholder value.

To close out 2022, that company is on the road, introducing itself to investors. With each new detail that emerges investors get a better sense of where the new stock should trade.

GE HealthCare is the firm and it hosted, on Thursday, analysts and investors in New York City to go over its business fundamentals and separation from

General Electric

(ticker: GE). The company said it expects roughly $2.7 billion in operating profit in 2022, which works out to earnings before interest, taxes, depreciation, and amortization, or Ebitda, of about $3.3 billion.

The company will start life apart from GE on Jan. 3, with about $1.8 billion in cash and $10.2 billion in long-term debt. With net debt of about $8.4 billion, GE HealthCare’s debt to Ebitda ratio will be about 2.5 times. Debt to Ebitda is a common measure of balance sheet strength and that ratio is solid enough to earn the company an investment grade credit rating.

Barron’s pegged the value of the entire GE healthcare business at $55 billion in August. That was based on comparable companies, such as

Siemens Healthineers

(SHL.Germany), and Wall Street estimates for GE HealthCare that ranged from $43 billion to $65 billion. With $8.4 billion in net debt, GE HealthCare’s stock market capitalization should be about $47 billion.

GE shareholders get one share of GE HealthCare for every three shares of GE held. That will leave GE HealthCare with about 364 million shares outstanding, so the stock price should be around $128.

That price, of course, is only a guide.

Siemens Healthineers

shares are roughly flat since late summer, so that comparison still helps. That company trades for roughly 16.3 times estimated 2022 Ebitda. At $128 a share, GE HealthCare would trade for about 16.7 times estimated 2022 Ebitda.

It is a small premium, but GE HealthCare has a plan to increase profit margins by a few percentage points and add to top line growth with targeted acquisitions. No one can really know how much credit the company will get for executing on its plan.

CEO Peter Arduini sounds confident his new company will be successful because of the people at GE HealthCare. About 40% of the managers at the company are new since he took over as GE HealthCare CEO in early 2022.

“I’ve shuffled the deck around, [we’ve] upgraded a significant amount of product management and commercial leaders,” Arduini tells Barron’s. “I want that feel of a more entrepreneurial company where…from an ownership standpoint, you can benefit.”

Arduini wants to expand the ownership of GE HealthCare stock from hundreds of managers that hold GE stock now to thousands that hold shares of the new company. Arduini also says it is easier to recruit at GE HealthCare as a stand-alone entity. It gives employees the feeling they matter more to results compared with when GE HealthCare was one division inside of all of GE.

That is a good sign for potential GE HealthCare investors. It is always management and people that creates shareholder value.

GE stock was up 0.4% at $81.81 in midday trading Monday. The

S&P 500
and

Dow Jones Industrial Average
were up 0.5% and 0.8%, respectively.

After the GE HealthCare separation is complete next month, the stock “GEHC” begins trading on the Nasdaq stock exchange on Jan. 4.