Tenet Healthcare’s Outpatient Business Strong, Debts a Drag

We issued an updated research report on Tenet Healthcare Corp. THC on Dec 9, 2015.

Tenet Healthcare has been witnessing consistent growth in operating revenues over the past few years. The greatest contributor toward this end was the outpatient business. Acquisition of outpatient businesses and the opening of more such facilities have increased the outpatient center count, thereby contributing positively to revenues.

Moreover, initiatives like mergers and acquisitions have been playing an important role in the company’s growth. The joint ventures with Baptist Health System in Birmingham, AL and United Surgical Partners International, both in Jun 2015 deserve particular mention.

Tenet Healthcare consistently enhances its business growth and optimizes its capital structure through financial and strategic plans. The company has been issuing new debt in order to pay the old debt with higher coupon rate, which has helped it in reducing borrowing costs. The company’s strong cash flow position also supports efficient capital deployment.

Also, per the health care reform legislation, the implementation of healthcare information technology (HIT) solutions is enhancing clinical decision support and providing physicians immediate access to each patient's electronic health record. This is improving operational efficiencies and reducing the probability of medical errors.

However, increase in the level of uncollectible accounts and doubtful debts raise caution. Moreover, Tenet Healthcare has been experiencing high levels of operating expenses in the past few years.

Operating expenses also increased in the first nine months of 2015. Increase in information technology service contract expenses related to the HIT implementation program, malpractice expenses, physician relocation costs, hospital provider fees, annual salary hikes and employee benefits further weigh on the margins from time to time.

Tenet Healthcare is also burdened with significant amounts of debt. As a consequence, the company deploys a substantial portion of its cash flow to pay the interests on its debts and thus is left with limited funds to utilize for its operations, growth initiatives or capital expenditures.

Tenet Healthcare currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the health care services space are MEDNAX, Inc. MD, Acadia Healthcare Company, Inc. ACHC and VCA Inc. WOOF. While MEDNAX sports a Zacks Rank #1 (Strong Buy), Acadia Healthcare and VCA Inc. hold a Zacks Rank #2 (Buy).

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