General Electric (NYSE:GE)
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6 Months : From Oct 2019 to Apr 2020
By Thomas Gryta
General Electric Co. aims to excite investors about its health-care division, a business that was tagged to be cast off but is now central to the company's turnaround efforts.
GE Healthcare, which is based in Chicago and employs more than 50,000 people, makes magnetic resonance imaging machines and other hospital equipment. At the depths of its crisis, GE set plans to spin off the unit. Now, Chief Executive Larry Culp refers to it as one of the conglomerate's pillars.
The division, with $20 billion in annual revenue, has been a cash cow for the troubled company: GE Healthcare accounted for 16% of GE's total revenue last year but 36% of its operating profit, according to data from S&P Global Market Intelligence.
But it is about to shrink. Soon after taking over, just over a year ago, Mr. Culp struck a deal to sell a part of the division that serves the biotechnology industry. The sale will raise $21 billion to help pay down GE's debt but leaves GE Healthcare without its fastest-growing businesses.
For many investors, the health-care business has been on the periphery for the past two years as they focused on the problems in GE's power and financial-services divisions. To get them enthusiastic about it, GE Healthcare is holding an investor meeting with the division's management on Monday.
"The perception is that the remaining health-care business, which is very large, is slow growth," said Nigel Coe, analyst at Wolfe Research, who will be listening for details on how the health division plans to increase sales, market share and profit margins.
Former GE CEO John Flannery ran the health business before being named to the top job in mid-2017. Problems at the conglomerate came to light during his tenure as CEO, leading to aggressive restructuring and his eventual replacement with Mr. Culp.
Mr. Flannery planned an initial public offering for the health division, part of a plan to focus on the power and aviation divisions. It was a course Mr. Culp supported until he cut a deal in February 2019 to sell the life-sciences part of the health business to his former company, Danaher Corp. Analysts expect GE Healthcare to stay inside GE while management works to improve its results; Mr. Culp has said GE has "optionality" for its future.
Life sciences, also called biopharma, sells equipment used in the biotechnology industry, which makes drugs composed of proteins made in living cells using a complex production process. The unit also makes imaging agents used in medical scans to highlight specific organs or functions. It accounted for about $4 billion in revenue last year.
The remaining GE Healthcare, expected to be the focus of Monday's meeting, is the more industrial side and traces its roots back more than a century when it began developing X-rays. It manufactures MRI machines, computed tomography scanners, X-ray systems and ultrasound devices. It also services equipment and sells related software.
That area of the business has slower growth but isn't prone to cyclical forces like other parts of GE, analysts said, something that could help the company as it continues to stabilize its finances.
"The business overall is solid but not exceptional," said Melius Research analyst Scott Davis. He called the division reasonably profitable and said there is plenty of room for Mr. Culp to improve sales growth and margins.
Morgan Stanley analysts project 2019 operating profit margins of 19.3% for GE Healthcare, but executives are expected to give details Monday on what that profitability will be after it sells the life-sciences business.
"The near- and medium-term opportunities we see to drive cash flow growth and improve operating margins in Healthcare are an important component of the value GE can create for our stakeholders over time," a GE spokeswoman said.
German rival Siemens AG has spun off its health business into a separate company, called Siemens Healthineers AG, that is 85% owned by the parent. The spinoff's shares are up 20% so far this year, which is similar to its parent's performance.
Siemens, which once sold everything from mobile phones to lightbulbs, has shed the conglomerate model under CEO Joe Kaeser and focused on its higher-growth divisions. It plans to spin off its power business next year, after merging it with its renewable-energy business.
GE has also streamlined its structure after cash-flow woes forced the company to twice slash its dividend, leaving it at just a penny per share. It merged its oil and gas business into Baker Hughes in 2017 and took a roughly two-thirds stake, but has recently sold its holdings to less than 40%. GE has also sold off its stake in Wabtec Crop. after merging its transportation business with the railroad supplier. GE expects to close the life-sciences sale to Danaher in early 2020.
After tumbling from $30 to below $10, GE shares have rallied more than 50% this year to close Friday above $11. The stock has advanced as Mr. Culp made progress on efforts to pay down debts and generate cash from the industrial operations.
Write to Thomas Gryta at firstname.lastname@example.org
(END) Dow Jones Newswires
December 01, 2019 08:14 ET (13:14 GMT)
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