Key Points

The tariff conflict between the U.S. and China hurts GE HealthCare's earnings. Hospital capital equipment spending in China continues to be sluggish. An improvement in the trade conflict will create upside potential for GE HealthCare, and management believes China is a long-term growth opportunity.

Shares in medical equipment company GE HealthCare Technologies(NASDAQ: GEHC) declined by 12.9% in April, according to data provided by  S&P Global Market Intelligence. The key reason for the decline comes from the "Liberation Day" tariffs announced by President Donald Trump at the start of the month.

GE HealthCare and tariffs

The tariffs and the subsequent response, notably from China, have a significant impact on a company that's a large exporter to the country and uses components sourced from China in its products. Management previously estimated (based on the pre-April tariff announcements) a negative impact of $0.05 in earnings per share (EPS) in 2025 from tariffs. Still, the new tariffs announced in April are expected to have an incremental negative impact of $0.80 in 2025, for a total of $0.85.

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Consequently, on its first-quarter earnings call in late April, management lowered its earnings and cash-flow expectations for 2025:

Full-year organic revenue growth is still expected in the 2%-3% range. Adjusted EPS is now expected to be in the $3.90-$4.10 range, compared with prior guidance of $4.61-$4.75. Free cash flow is now expected to be at least $1.2 billion compared to prior guidance of at least $1.75 billion.

CEO Peter Arduini discussed tariffs on the earnings call. He said, "We have conservatively assumed that the bilateral U.S. and China tariffs continue, accounting for 75% of our total net tariff impact." As such, the U.S./China trade tariff conflict is the key relationship to watch for GE HealthCare investors.Image source: Getty Images.

Growth aspirations

It's a somewhat frustrating situation for investors because the company's investment case rests on the idea that solid underlying but low growth in developed markets would be supplemented by higher growth in end markets like China, where there's a desire to improve healthcare standards.

Management sees China as an attractive long-term market, but tariffs aside, there are near-term headwinds. For example, management lowered guidance last year on lower demand from China, as the hospital capital equipment spending has taken far longer to drop into orders than management expected.

Story Continues

The weakness in 2024 also flows into 2025, with management expecting revenue from China to decline by a mid-single-digit percentage in the first half, followed by a sequential improvement in the second half.Image source: Getty Images.

What's next for GE HealthCare?

The U.S./China trade relationship will dominate the outlook for GE HealthCare, but that need not be a negative thing now. With the market having priced in some bad news, some trade deal, or at least de-escalation of the conflict, would be good news. Still, that's not a certainty. GE HealthCare competes in China with European peers Siemens Healthineers and Philips, which might find themselves in a stronger competitive position due to the conflict.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends GE HealthCare Technologies. The Motley Fool has a disclosure policy.

Here's Why GE HealthCare Stock Sank in April was originally published by The Motley Fool

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