On April 3, 2014, we issued an updated research report on
Tenet Healthcare Corp.
). The company has been witnessing intense inpatient volume
pressure and increased expenses for quite some time. These
headwinds are expected to persist in the near term, thereby
weighing on the positive impact of improved outpatient revenues
and inorganic growth.
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Earlier, Tenet Healthcare reported fourth-quarter 2013 earnings
that surpassed the Zacks Consensus Estimate. However, earnings
failed to comply with the year-ago number due to dismal inpatient
volumes. With expected inpatient volume trends of (2%)-0% in
2014, inpatient operations and revenues are expected to remain
under pressure. However, this Zacks Rank #5 (Strong Sell)
healthcare services company delivered positive surprises in two
of the last four quarters, with an average beat of 9.45%.
Apart from weak inpatient volumes, high bad debts due to a huge
client base of uninsured and underinsured patients, and a high
burden of co-payments and deductibles, are matters of concern.
Apart from burgeoning bad debt levels, the impact of
industry-wide and company-specific challenges has led operating
expenses to increase significantly. For 2014 also, this trend is
expected to continue reflecting an increase in selected operating
expenses for Tenet Healthcare's hospital operations on an
adjusted admission basis by 1.5-2.5% for 2014.
Moreover, Tenet Healthcare is a highly leveraged company.
Substantial long-term debts and deteriorating debt to equity
ratio reflects the financial risks of the company. In fact, Tenet
Healthcare deploys a substantial part of its cash flow to pay
interests on debts and thus is left with limited funds for
operations, growth initiatives or capital expenditures. Legal
hassles have also drained out cash, weighing on expenses and
affecting the goodwill of the company.
On a brighter note, growth in operating revenues has been
impressive over the past few years and 2013 witnessed a
significant 21.7% increase. The California Provider Fee program
is proving beneficial in this regard and Tenet Healthcare is
expected to record revenues worth $475 million from this program
through 2016. While inpatient revenues remained pressed,
outpatient business has generated significant margins.
We also remain content about the mergers and acquisitions
undertaken by the company over the last two years. These
inorganic growth strategies helped the company strengthen its
operations as well as expand geographically. Notably, the
Vanguard Health Systems acquisition in Oct 2013 is expected to
boost company earnings, especially from the second half of 2014.
Tenet Healthcare also stands out in its remarkable capital
deployment initiatives. Further, given the concentration of the
company's operations in California, Florida and Texas, which
historically have high percentages of uninsured and underinsured
patients, Tenet Healthcare enjoys a strong competitive advantage
from extended insurance coverage.
Other Stocks to Consider
) are some better-ranked stocks in the healthcare services space.
While Chemed sports a Zacks Rank #1 (Strong Buy), Aetna and
MEDNAX carry a Zacks Rank #2 (Buy).