Shares in GE Healthcare (GEHC -0.25%) and UPS (UPS -0.20%) are trading down more than 16% over the last three months, and the decline is creating a good buying opportunity. Both companies face near-term earnings headwinds but trade at attractive valuations and have plenty of long-term growth prospects.
Here's why both stocks deserve a closer look.
The investment case for UPS
UPS' stock price is down 10% this year. Its decline represents the deteriorating condition of its end markets and, consequently, management's lowering full-year guidance. Management started the year expecting revenue of $97 billion to $99.4 billion and an adjusted operating margin of 12.8%-13.6%, but now expects $93 billion and 11.8%, respectively.
The decline represents a combination of lower-than-anticipated delivery volumes due to the weakening economy and the disruptive negotiations with the Teamsters union.
Due to current economic conditions, UPS is being hit by a double blow to volume. Not only are high interest rates crimping business activity, but there's also a natural correction in the type of consumer spending taking place. Whereas the lockdowns of previous years encouraged spending on physical goods that could be delivered to the home, this year has seen a shift toward services and experiences such as travel and leisure.
It's adding up to create challenges for UPS. Anyone buying the stock needs to be mindful that the company could lower guidance again this year.
Still, history suggests the global economy will return to growth when the interest-rate hiking cycle is over, which means higher delivery volumes. Moreover, management continues positioning UPS as a stronger company after the slowdown.
Image source: Getty Images.
It's easy to forget that UPS hit its 2023 targets a year early in 2022 and is also on track to achieve its strategic aims from its 2021 Investor Day presentation. Of particular note, its highly successful digital-access program (DAP) related revenue is set to hit $3 billion in 2023 from just $1.3 billion in 2021.
DAP is an initiative to help small- and medium-sized businesses (SMBs) offer customers similar experiences (order management, delivery, tracking, etc.) to those provided by larger customers in e-commerce. The explosion of interest in expanding e-commerce capability from SMBs during the pandemic created an ideal growth market for DAP, and UPS is now rolling it out internationally. Similarly, UPS will hit $10 billion in healthcare revenue in 2023.
Trading at less than 17x earnings and currently sporting a 4.2% dividend yield, UPS is an attractive stock for investors who can close their eyes and ears if there's some negative news over the next few months.
GE Healthcare's best days are yet to come
As the name suggests, GE Healthcare is the former healthcare business of General Electric. The spin-off from the parent company early in 2023 created a mix of near-term headwinds and long-term growth opportunities. These two factors are conspiring to help obscure the investment proposition at GE Healthcare.
For example, if you just looked at the headline numbers associated with the company, you probably would avoid the stock like the plague.
|
GE Healthcare |
2022 |
2023 (Estimated) |
Change |
|---|---|---|---|
|
Revenue |
$18.34 billion |
$19.44 billion to $19.8 billion |
6%-8% |
|
Adjusted EBIT margin |
15.6% |
15%-15.5% |
Down 10 to 60 basis points |
|
EPS |
$4.63 |
$3.70-$3.85 |
Down 16.8% to 20% |
Data source: GE Healthcare presentations. bp = basis points, whereby 100 basis points is 1%, EBIT = earnings before interest and taxation, EPS = earnings per share.
That said, the headline data doesn't provide the full story on this stock. There are two additional factors to consider.
First, CFO James Saccaro outlined on an earnings call in July that the addition of approximately $200 million in recurring stand-alone costs annually has affected the company's segment EBIT margin rates. If you adjust for these costs, the stand-alone EBIT margin in 2022 would have been 14.5%. With the adjustment, management's guidance for EBIT margin of 15%-15.5% actually implies margin expansion.
Second, GE Healthcare is an independent company, so management is free to invest for growth. That will come from developing new products, raising prices, and ongoing investment in artificial intelligence (AI) and precision medicine. Most notably, it's the only imaging company developing pharmaceutical diagnostics (contrast and molecular imaging) used with scanners to diagnose a patient.
Image source: Getty Images.
The latter is a major plus as the market moves toward precision healthcare techniques that use diagnostic agents to deliver drugs and monitor patient progress precisely, rather than just diagnose them.
Management is targeting an adjusted EBIT margin in the high teens to 20% range over the medium term. If it can get there using these growth drivers, the stock could appreciate substantially.
