We have reiterated our Neutral recommendation on Tenet Healthcare Corp. (THC) based on its strong results in all lines of business, which were partly offset by the decline in paying and total admissions as well as higher-than-expected operating expenses. Besides, the reduced earnings projections for the rest of 2011 warrant caution.
Tenet reported second-quarter income from continuing operations of $66 million or 9 cents per share, at par with the Zacks Consensus Estimate. Nevertheless, it beat the operating income of $65 million or 7 cents per share in the prior-year quarter. Operating income for the reported quarter excludes $10 million or 1 cent per share related to litigation and impairment pre-tax expenses.
Tenet has been growing its operating revenues, year over year and continues to acquire various diagnostic imaging centers to improve operating performance and create shareholder value. During the six months ended June 30, 2011, Tenet acquired one diagnostic imaging center each in Florida and South Carolina, one oncology center in Texas and one physician practice entity in North Carolina.
Moreover, the health care reform signed in March 2010 is expected to impact hospital companies like Tenet positively. It aims to expand the pool of insured patients and this should aid hospitals' bottom line. Further, reductions in reimbursement rates in 2010 are expected to drive reimbursements for caring for uninsured and underinsured patients as early as 2014.
Additionally, the use of healthcare information technology (HIT) solutions by Tenet has provided physicians immediate access to a patient's electronic health record and has improved operational efficiencies. Besides, easy access to right information and the alerts embedded in the system have reduced the probability of medical errors. It has also enhanced the company’s revenues, by improving the company’s quality of care.
However, Tenet is a highly leveraged company and has approximately $3.99 billion of long-term debt as of June 30, 2011, as well as approximately $174 million in letters of credit outstanding under the senior secured revolving credit facility. Moreover, the company requires substantial cash to fund its operations and capital expenditure requirements and any imbalance could weigh significantly on the financials.
Additionally, Tenet serves a large number of uninsured patients and underinsured patients with an increased burden of co-payments and deductibles as a result of changes in their healthcare plans. Consequently, the company has a high level of uncollectible accounts and rising bad debts.
Moreover, the impact of industry-wide and company-specific challenges, including decreased volumes, decreased demand for inpatient cardiac procedures and high levels of bad debt, has led to the rise of operating expenses from $7.81 billion in 2007, $8.27 billion in 2008 and $8.48 billion in 2009 to $8.57 billion in 2010. Further, Tenet witnessed a year-over-year increase of 3.4% in total controllable operating expenses in the second-quarter of 2011.
The Zacks Consensus Estimate of third-quarter earnings is currently at 1 cent per share, up from a loss of 1 cent per share in the year-ago quarter. Of the 16 firms covering the stock, 2 firms have revised their estimates downward while no upward revisions were witnessed.
For 2011, Tenet’s earnings are expected to be 37 cents per share, falling about 10% from 2010. The company competes with HCA Inc. (HCA) and Community Health Systems Inc. (CYH).
On Friday, the shares of Tenet closed at $4.56, up 3.17%, on the New York Stock Exchange. The company carries a Zacks #3 Rank, which implies a short-term Hold rating.
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