Tenet Rises to Outperform - Analyst Blog
December 02 2011 - 4:45AM
Zacks
We have upgraded our recommendation on Tenet Healthcare
Corp. (THC) to Outperform from Neutral based on its strong
operating performance in the third quarter of 2011, which raises
ample optimism for future growth.
Tenet reported third-quarter 2011 operating earnings of 4 cents
per share, beating the Zacks Consensus Estimate of 1 cent and
operating loss of 1 cent in the prior-year quarter. The improvement
was driven by strong results in all lines of business, especially
the robust growth in outpatient volumes and higher admissions.
Since 2006, the company has been steadily generating operating
revenue growth. The improved results are attributable to
significant contribution from Tenet’s general hospitals, which have
been showing a revenue growth trend due to increase in outpatient
visits, improvement in managed care pricing and a favorable shift
in managed care payer mix.
Additionally, Tenet has been gradually expanding its operating
capacity via acquisitions. In August 2011, the company announced an
agreement to acquire CardioVascular Associates P.C. during fourth
quarter 2011 and subsequently, merge it with subsidiary Brookwood
Medical Center to form CardioVascular Associates of the Southeast,
which will act as a subsidiary of the group company.
Further, during the nine months ended September 30, 2011, Tenet
acquired one diagnostic imaging center each in Florida and South
Carolina, two oncology centers in Texas and Florida and 18
physician practice entities. Additionally, the company also
purchased majority interests in a diagnostic imaging center in
Georgia, three ambulatory surgery centers in Texas and one in South
Carolina.
Going ahead, the company also aspires to acquire hospitals and
other health care assets to increase its outpatient revenues, as
historically, the outpatient business has generated significantly
higher margins than the other business lines.
Moreover, the issue of new 6.5% senior secured notes is likely
to be beneficial for Tenet as the subsequent repayment of 9.0%
senior secured notes from the proceeds will significantly reduce
interest payments. While the total debt of the company has
increased with the issue, the new debt has improved the company’s
debt maturity profile.
Additionally, the health care reform bill signed in March 2010
is expected to impact hospital companies like Tenet positively. It
aims to expand the pool of insured patients by imposing an annual
penalty on uninsured individuals and employers who do not provide
health insurance cover to employees from 2014 onwards, which should
aid the hospitals' bottom lines.
In addition, given the concentration of Tenet’s operations in
California, Florida and Texas, which historically
have higher percentages of uninsured and underinsured patients, the
company enjoys a strong competitive advantage in benefiting from
extended insurance coverage.
However, on
the downside, Tenet is a highly leveraged company with
approximately $3.97 billion of long-term debt and $169 million of
letters of credit outstanding under the senior secured
revolving credit facility as of September 30, 2011.
Additionally, Tenet has been experiencing a high level of
operating expenses during the past few years. The impact of
industry-wide and company-specific challenges have led to the rise
of operating expenses to $8.57 billion in 2010 from $8.48 billion
in 2009, $8.27 billion in 2008 and $7.81 billion in 2007.
Nevertheless, the positives far outweigh the negatives, leading
to increased earnings expectation for the upcoming quarters. The
Zacks Consensus Estimate of fourth-quarter earnings is currently 14
cents per share, up 45% from the year-ago quarter. 12 out of 15
firms covering the stock have revised their estimates upward, while
no downward revisions were witnessed in the past 30 days.
For 2011, Tenet’s earnings are expected to be 43 cents per
share, up 4% from 2010. The company competes with HCA
Inc. (HCA) and Community Health Systems
Inc. (CYH).
On Thursday, the shares of Tenet closed at $4.68, up 0.65%, on
the New York Stock Exchange. The company carries a Zacks #1 Rank,
which implies a short-term Strong Buy rating.
COMMNTY HLTH SY (CYH): Free Stock Analysis Report
HCA HOLDINGS (HCA): Free Stock Analysis Report
TENET HEALTH (THC): Free Stock Analysis Report
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