Is GE HealthCare Technologies Inc. (NASDAQ:GEHC) Expensive For A Reason? A Look At Its Intrinsic Value

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Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, GE HealthCare Technologies fair value estimate is US$59.06

  • GE HealthCare Technologies’ US$74.38 share price signals that it might be 26% overvalued

  • The US$83.88 analyst price target for GEHC is 42% more than our estimate of fair value

How far off is GE HealthCare Technologies Inc. (NASDAQ:GEHC) from its intrinsic value? Using the most recent financial data, we’ll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today’s value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There’s really not all that much to it, even though it might appear quite complex.

We generally believe that a company’s value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for GE HealthCare Technologies

What’s The Estimated Valuation?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:

10-year free cash flow (FCF) forecast

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

US$1.52b

US$1.63b

US$1.59b

US$1.58b

US$1.58b

US$1.60b

US$1.62b

US$1.64b

US$1.67b

US$1.70b

Growth Rate Estimate Source

Analyst x3

Analyst x1

Est @ -2.00%

Est @ -0.74%

Est @ 0.15%

Est @ 0.77%

Est @ 1.21%

Est @ 1.51%

Est @ 1.72%

Est @ 1.87%

Present Value ($, Millions) Discounted @ 7.5%

US$1.4k

US$1.4k

US$1.3k

US$1.2k

US$1.1k

US$1.0k

US$973

US$918

US$869

US$823

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$11b

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We discount the terminal cash flows to today’s value at a cost of equity of 7.5%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$1.7b× (1 + 2.2%) ÷ (7.5%– 2.2%) = US$33b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$33b÷ ( 1 + 7.5%)10= US$16b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$27b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$74.4, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.

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Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company’s future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at GE HealthCare Technologies as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we’ve used 7.5%, which is based on a levered beta of 1.060. Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for GE HealthCare Technologies

Strength

Weakness

Opportunity

Threat

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to “what assumptions need to be true for this stock to be under/overvalued?” For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value lower than the current share price? For GE HealthCare Technologies, we’ve compiled three further factors you should further research:

  1. Risks: For example, we’ve discovered 1 warning sign for GE HealthCare Technologies that you should be aware of before investing here.

  2. Future Earnings: How does GEHC’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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