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In a year when the S&P 500 (SNPINDEX: ^GSPC) is up 13.8%, the declines in healthcare stocks such as Danaher (NYSE: DHR) (down nearly 2.7%) and GE Healthcare Technologies (NASDAQ: GEHC) (down 16.7%) are disappointing. Both stocks have something to prove to investors when they report third-quarter earnings in a few weeks, but the good news is they have a good chance of doing so, and their valuations suggest investors are likely to be rewarded if they do.
Here's why both stocks are primed to deliver on the upside in the fourth quarter and beyond.
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First, here's a look at both companies' forward price-to-earnings (PE) ratios. As you can see, the forward ratios are significantly lower than the PE ratios both stocks have traded at in recent years.
Naturally, that's because of operational setbacks both companies have suffered. For GE Healthcare Technologies, the question is convincing the market that its margins are on the way to recovery. It can capitalize on the excellent order growth so far this year. For Danaher, it's about confirming that the bioprocessing shipments that were pushed out in the second quarter really are timing issues rather than any kind of continued destocking that will impact 2027.
There isn't a problem with orders; organic orders grew 11.1% in the second quarter, resulting in a book-to-bill ratio of 1.15, implying future revenue growth. The problematic issue for GE Healthcare is its margin challenges, driven by cost inflation in oil, chips, and freight. At the same time, the Patient Care Solutions (PCS) business reported a segment loss of $26 million in the second quarter, driven by a 13.5% year-over-year decline in sales.
Both issues appear to be resolvable, with management placing PCS under strategic review, a move that often results in disposals. As for the margin issues, management is calling out a second-half margin improvement led by higher pricing, new product introductions, and productivity actions taken in the first half.
As such, merely maintaining full-year guidance of organic revenue growth of 3%-4%, adjusted earnings per share of $4.80-$5.00, and adjusted earnings before interest and taxation (EBIT) margin expansion from 15.3% in 2025 to 15.4%-15.7% in 2026 would likely be a positive for the stock.
The company reports out of three segments: biotechnology, life sciences, and diagnostics. As discussed previously, there wasn't a lot wrong with its second-quarter results in the latter two businesses, but the relative weakness in the biotechnology business spooked the market. The biotechnology segment reported just 2.5% core revenue growth in the second quarter, as management disclosed that shipments from its bioprocessing business (which Danaher acquired from the former General Electric when GE Healthcare was in it) had shifted from the second and third quarters into next year.
Outgoing CEO Rainer Blair noted that bioprocessing "consumables growth came in below our expectations as a few large shipments for programs at our commercial customers moved out of the quarter."
These events led to fears that the bioprocessing destocking that took place after the massive investments made during the pandemic hadn't quite been cleared. However, Blair argued that industry inventory levels were lower than in previous years, and CFO Matt Gugino predicted the bioprocessing business would grow in the mid-single-digit percentage in the third quarter, adding, "We're probably exiting more in that mid- to high single digits in Q4 as we go forward."
Just as with GE Healthcare, merely meeting that guidance and confirming the full-year guidance would probably be enough to lift the stock, and companies beating expectations could see their stocks soar.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Danaher and GE HealthCare Technologies. The Motley Fool has a disclosure policy.
2 Beaten-Down Healthcare Stocks That Could Soar in the Fourth Quarter was originally published by The Motley Fool
