On Mar 4, 2014, we issued an updated research report on Tenet Healthcare Corp. THC. Last week, the company reported fourth-quarter earnings that missed the Zacks Consensus Estimate but improved year over year. The upside was driven by the strategies undertaken by the company to gain market share, economic improvement and expanded health coverage, higher admissions and growth in the Conifer business.
Tenet Healthcare serves a large number of uninsured and underinsured patients with a high burden of co-payments and deductibles. This raises the company’s provision for doubtful debts and 2014 was also no exception. Operating expenses have also increased on account of higher salaries, wages and benefits, supplies and other operating expenses. If the company doesn’t resort to strong cost management measures, such high expenses might weigh on margins.
Moreover, inpatient revenues have been a drag for some time and CMS’ implementation of a 1% decrease in payments for hospitals is expected to weigh on inpatient revenues going forward. Tenet Healthcare is a highly leveraged company and owing to the debt issuances in the recent past, financial leverage is expected to increase.
On a bright note, Tenet Healthcare’s growth in outpatient business is boosting the top line. Additionally, the approval of the California Provider Fee program in the fourth quarter of 2014 led to the contribution of $165 million in revenues, higher than the projected $140 million.
The company also has a compelling inorganic growth story. With deals with entities like Emanuel Medical Center in Turlock, Texas Regional Medical Center Ascension Health and Dignity Health, and Vanguard Health Systems in its kitty, Tenet Healthcare’s operational strength is expected to improve further thereby driving the company’s top line higher.
Tenet Healthcare consistently enhances business growth and optimizes its capital structure through financial and strategic plans. The company had issued notes with lower coupon rate to repay debts with higher interest rate. Moreover, some provisions of the health care reform legislation signed in Mar 2010 are expected to impact hospital companies like Tenet Healthcare positively.
Further, owing to the Supreme Court’s pending decision regarding the extension of cost-sharing subsidies to individuals purchasing coverage through federal government’s health insurance exchange instead of state-based exchange, health insurance companies like Tenet Healthcare are slated to receive subsidies on behalf of consumers.
Other well-placed stocks in the healthcare space that look attractive at current levels include Lifepoint Hospitals Inc. LPNT, VCA Inc. WOOF and Amedisys Inc. AMED.
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