We have downgraded our recommendation on
Tenet Healthcare Corp.
(
THC
) to Neutral from Outperform based on its rising expenses and bad
debts coupled with a highly leveraged balance sheet.
However, strong organic and inorganic growth and strategic
plans to optimize capital structure are the positives.
Tenet Healthcare is scheduled to announce its third quarter
results on November 7 before the bell. The Zacks Consensus
Estimate for the quarter is currently pegged at 36 cents,
reflecting a 126.7% year over year improvement.
Tenet Healthcare has been generating consistent growth in
operating revenues since 2006. The first half of 2012 also
witnessed operating revenue growth of 4.2% year over year to
$4.57 billion. The improved results were attributable to
significant contribution from Tenet Healthcare's general
hospitals, which have generated revenues in excess of 96% of the
net operating revenues for all periods.
Tenet Healthcare has also been steadily expanding its
operating capacity via acquisitions and alliances. Moreover, the
company is trying to enhance business growth and optimize its
capital structure through financial and strategic plans
comprising acquisitions, share repurchases, debt repayment and a
reverse stock split. While the acquisitions will be directed
toward strengthening the company's main business lines, the
planned share buyback will enhance earnings per share and boost
shareholder value.
However, Tenet Healthcare is a highly leveraged company with
approximately $4.51 billion long-term debt as of June 30, 2012,
compared with shareholders' equity of only $1.18 billion. This
implies a long-term debt-to-equity ratio of 3.88.
Moreover, Tenet Healthcare serves a large number of uninsured
and underinsured patients with a high burden of co-payments and
deductibles. Consequently, the company has a high level of
uncollectible accounts and rising bad debts, due to which Tenet
Healthcare has been increasing the provision for doubtful
debts.
Furthermore, Tenet Healthcare is experiencing high levels of
operating expenses over the past few years. The impact of
industry-wide and company-specific challenges, including
decreased volumes and demand for inpatient cardiac procedures
along with high levels of bad debt, has led to the rise of
operating expenses.
Tenet Healthcare competes with
Universal Health Services Inc.
(
UHS
) and
HCA Holdings, Inc.
(
HCA
).
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