UBS downgrades GE Healthcare to 'sell' citing overvaluation and China risk

Investing.com -- UBS has downgraded GE Healthcare Technologies Inc (NASDAQ:GEHC). to a 'sell' rating from a 'neutral' signaling growing concerns about the company's valuation and its exposure to competitive risks in the Chinese Medtech market. 

Despite GEHC’s shares having climbed roughly 20% year-to-date, UBS analysts caution that the current pricing overstates the company’s potential and underestimates the emerging risks.

The downgrade stems largely from the company’s soaring valuation. GEHC shares are now trading at a 5% price-to-earnings premium compared to Siemens Healthineers, its closest peer. 

Historically, GEHC traded at a 15% discount over the past 18 months. UBS analysts argue that this sharp reversal is unjustified, especially when considering GEHC’s projected earnings per share compound annual growth rate of 10%, which trails behind SHL’s 11%. 

The analysts believe that the market's elevated expectations for GEHC’s near- and mid-term growth are likely to be disappointed.

One of the most pressing concerns highlighted by UBS is GEHC’s vulnerability to disruptions in China. 

UBS’s research suggests that Chinese imaging companies, particularly United Imaging and Mindray, are poised to challenge the dominance of Western manufacturers, both within China and globally. 

GEHC, with 11% of its revenues directly tied to China’s domestic market and an additional 37% exposed to potential international competition from Chinese companies, is at risk. 

The gradual internationalization of these Chinese competitors is likely to put downward pressure on GEHC’s growth prospects, especially in the highly competitive imaging sector.

UBS also casts doubt on GEHC’s ambitious mid-term margin targets. Management has outlined plans to expand group margins from 14.5% in 2022 to as high as 20%, relying heavily on growth in the Imaging division. 

However, UBS analysts point out that comparisons with Siemens Healthineers' 20% margin are misleading due to the two companies’ differing business mixes. 

While SHL’s high-margin ultrasound revenues bolster its figures, GEHC does not benefit from the same product mix. 

As a result, UBS forecasts that a mid-teens margin is a more realistic target for GEHC over the next few years, leaving the firm’s earnings 1-6% below consensus estimates for 2025-2028.

UBS has revised its financial forecasts for GEHC. The analysts have trimmed their revenue estimates by 0% to 1% for 2024-2028, driven primarily by expected competitive pressures in the Imaging and Ultrasound segments. 

This adjustment also reduces their adjusted EBIT forecasts by 0-3% over the same period, with GEHC’s adjusted EPS now projected to fall 3% to 6% below consensus starting from next year. 

Reflecting this more cautious outlook, UBS has lowered its price target for GEHC to $74, down from $84. The new target is derived from a discounted cash flow model, factoring in lower earnings expectations, a reduced terminal margin of 17.2%, down from 18%, and a terminal growth rate of 1.5%, down from 2%. 

At this price, UBS believes GEHC would trade at a more reasonable 16x 2025 PE, aligning better with its 10% EPS CAGR forecast and the risks posed by increased Chinese competition.

Shares of the company were down 1.6% in pre-open trade.