Tenet Healthcare Corp. (THC) reported third-quarter 2014 operating earnings of 36 cents per share that surpassed the Zacks Consensus Estimate of 10 cents. However, the results compared unfavorably with the year-ago quarter earnings of 45 cents per share.
Higher operating expenses mainly led to the year-over-year decline.
Including post tax impairments, restructuring charges, acquisition-related expenses, litigation and investigation expenses as well as loss on extinguishment of debt, net income for Tenet Healthcare in the reported quarter was 9 cents per share, lower than an income of 27 cents in the year-ago quarter.
Operational Update
Net operating revenue of Tenet Healthcare came in at $4.2 billion, up 73.5% from the prior-year quarter. The improvement was largely attributable to an increase in patient volume, improvement in terms of the commercial managed care contracts and better performance in the Conifer services business. However, a decline in health plan revenues and no revenue recognition from the California Provider Fee program in the third quarter of 2014 were setbacks. Revenues exceeded the Zacks Consensus Estimate of $4 billion and the company’s guided range of $3.8–$4 billion.
Tenet Healthcare’s net patient revenue per adjusted admission decreased 2.7% year over year to $11,692.
Total admissions increased 4.6% while adjusted admissions rose 5.8%, both on a year-over-year basis. On the other hand, the area of strategic focus through surgeries increased 14.4 % while emergency department visits grew 8.2%.
Bad debt expense decreased 40% from the prior-year quarter to $249 million due to a decline in uninsured revenues. As a percentage of revenues, bad debt expense decreased 390 basis points year over year to 5.6%.
Tenet Healthcare’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) improved 59.4% year over year to $459 million in the third quarter, which exceeded the guided range of $400–$450 million.
Financial Position
As of Sep 30, 2014, Tenet Healthcare had cash and cash equivalents of $200 million, up from $113 million as of Dec 31, 2013. The company exited the quarter with total assets amounting to $17.3 billion, up from $16.5 billion as on Dec 31, 2013. Shareholder equity at the reported quarter-end was $735 million, down from $755 million as of Dec 31, 2013.
Net cash inflow from operating activities in the first nine months of 2014 was $468 million, higher than $334 million in the year-ago period.
Tenet Healthcare’s capital expenditure increased to $211 million in the third quarter of 2014 from $142 million a year ago.
Guidance
The board of directors of Tenet Healthcare raised the 2014 adjusted EBITDA outlook to $1.90–$1.95 billion from $1.85–$1.95 billion. The earnings per share guidance for 2014 was updated to $1.26–$1.78 per share, compared with 65 cents–$1.83 per share guided earlier.
Net operating revenue guidance was raised to $16.4–$16.6 billion from $16–$16.25 billion.
Tenet Healthcare reiterated its adjusted net cash flow guidance for 2014. Adjusted net cash flow from operations is expected to range from $1.05 billion to $1.1 billion. This is higher than the 2013 operating cash flow of $589 million. Adjusted free cash flow is expected in the range of $50–$200 million.
Our Take
Although Tenet Healthcare’s third-quarter operating earnings declined year over year, it successfully surpassed our expectations. Operating revenues witnessed a significant upside. Growth strategies implemented by the company led to volume increases and patient admissions. However, despite the expense management initiatives, third-quarter expenses rose high, mainly on account of increase in salaries, wages and benefits and supplies expenses.
Moreover, the company is expected to recognize increased revenues from the approval of the California Provider Fee Program by Dec 2014. We expect this to drive earnings as well. Additionally, a decrease in bad debt expense and a raised guidance makes us optimistic about the company’s prospects.
Other Stocks in the Healthcare Space
WellPoint Inc. (WLP) reported third-quarter 2014 adjusted income of $2.36 per share, beating the Zacks Consensus Estimate of $2.28.
Molina Healthcare Inc.’s (MOH) third-quarter 2014 operating earnings of 79 cents per share handily beat the Zacks Consensus Estimate of 41 cents.
Health insurer Aetna Inc. (AET) posted third-quarter 2014 earnings of $1.79 per share, way ahead of the Zacks Consensus Estimate of $1.58.
Zacks Rank
Currently, Tenet Healthcare carries a Zacks Rank #2 (Buy).
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