On May 22, 2014, we issued an updated research report on Tenet Healthcare Corp. (THC). We believe that growth in outpatient business, synergies from the VHS acquisition and focus on inorganic growth are likely to mitigate the adverse effects of soft inpatient volumes and high levels of bad debt.
Earlier, Tenet Healthcare reported first-quarter 2014 loss that was narrower than the Zacks Consensus Estimate loss. However, results compared unfavorably with the year-ago earnings due to higher operating expenses.
Tenet Healthcare has been generating consistent growth in operating revenues and the first quarter was no exception. Improved terms of the commercial managed care contracts and better performance in the outpatient and Conifer services business led to the improvement. Revenues are also expected to increase in 2014 and through 2015–16 as Tenet Healthcare expects the CMS to approve the California Provider Fee program. The outpatient business has been a major contributor to the increase in revenues. Further, the launch of MedPost Urgent Care in May 2014 is expected to enhance the outpatient business.
Over the years, Tenet Healthcare has been steadily expanding its operating capacity through acquisitions and alliances. The company identified $100–$200 million of synergies from the VHS acquisition (of which $50–$100 million is expected to be captured in 2014) that is likely to exceed in the long run. The two-year contract with Aetna Inc. (AET) signed in Feb 2014 and extended in May 2014 for a multi-year period to offer healthcare services to the latter’s members and the collaboration with Yale New Haven Health System in Connecticut in Mar 2014 are expected to boost operations and enhance membership. Tenet Healthcare has also been prudent in its capital deployment strategies, which should help in retaining investors’ confidence.
Despite Medicare-related rate cuts, the Zacks Rank #3 (Hold) stock has benefited from coverage expansion in the first quarter of 2014. Tenet Healthcare expects to benefit from the healthcare reform further through the rest of 2014, thereby enhancing earnings before interest, taxes, depreciation and amortization (EBITDA).
On the flip side, as Tenet Healthcare serves a huge number of uninsured and underinsured patients with a high burden of co-payments and deductibles, its bad debt levels are quite high. Additionally, the company’s operating expenses have been mounting over the past few years. A rise in salaries, wages and benefits as well as other operating expenses also increased overall operating expenses in the first quarter.
After reporting steady improvement since 2010, inpatient revenues started declining from the beginning of 2013. Although inpatient revenues increased 2.1% in the first quarter of 2014, the CMS proposed Medicare inpatient payment changes for federal fiscal year 2015 (that is scheduled to commence on Oct 1, 2014), announced in April 2014, is expected weigh on inpatient revenues going forward. Moreover, Tenet Healthcare is a highly leveraged company. We believe that due to increasing financial leverage, the company could face problems in procuring funds for its working capital requirements.
Other Stocks to Consider
Investors interested in the healthcare services space could consider stocks like Almost Family Inc. (AFAM), and RadNet, Inc. (RDNT). While, Almost Family sports a Zacks Rank #1 (Strong Buy), RadNet carries a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment