Last week, U.S. healthcare services company Tenet Healthcare Corporation THC reported strong third-quarter 2024 results. Since the announcement on Oct. 29, before the opening bell, shares of the company have rallied 19.6% to $166.87, reflecting investor optimism about its improved outlook for 2024. With this increase, the stock is nearing its 52-week high of $171.20.
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Does THC’s growing operational strength present a buying opportunity? Or does the proximity to its 52-week high warrant caution? Before diving into these considerations, let's examine the highlights of THC's recent quarterly results and their implications for the company's future.
3 Major Takeaways From THC’s Q3 Earnings
Strong Top and Bottom-Line Performance: Tenet Healthcare's adjusted EPS of $2.93 surpassed the Zacks Consensus Estimate by 25.8%, reflecting a 103.5% year-over-year surge. The net operating revenues rose 1.1% to $5.12 billion, beating expectations by 1.5%. This growth was driven by higher same-hospital admissions, a favorable payer mix and increased Medicaid supplemental revenues. A declining operating expense level also contributed to the upside.
Hiked Outlook: Adjusted EPS is now anticipated to be within $11.12-$11.73, higher than the prior guidance of $10.41-$11.12. The mid-point of the revised outlook implies a 63.7% rise from the 2023 figure. Adjusted EBITDA is now estimated to be within the range of $3.9-$4 billion, up from the earlier view of $3.825-$3.975 billion.
Demand Growth:The company continues to experience strong demand for its services, which is expected to continue throughout the year. Improving labor market conditions and staffing solutions are enabling hospital companies to hire more workers and reopen previously closed services due to pandemic-related challenges. This restoration in capacity is anticipated to aid same-hospital figures.
THC’s Focus on Quality Assets to Address Rising Demand
The aging population and the rising cases of diseases are expected to sustain long-term demand for hospital services. Tenet Healthcare, with its acquisitions and de novo facilities, is likely to capitalize on this trend. Its expansionary moves will help it capture more market share in a fragmented market. At the third-quarter end, it had stakes in 520 ambulatory surgery centers and 24 surgical hospitals across 37 states.
The company’s divestments of non-core and less profitable businesses are freeing up capital for higher-return investments. Recently, it completed the divestment of its 70% majority ownership interest in Brookwood Baptist Health in Birmingham, which included five hospitals and related operations. It is now prioritizing the expansion of low-cost, high-quality ambulatory surgical centers.
THC’s Improving Business
Management’s transformative efforts aim to create a more predictable, capital-efficient business model. This will not only boost margins and free cash flow but also create a mix of businesses that can thrive in any political and regulatory landscape. This reduces risks for investors, making it a safer choice.
Additionally, its investments in selected AI-enabled technologies will enhance the clinical and administrative workflow and efficiency. This is expected to lower costs, reduce patient wait times and improve patient experiences.
YTD Price Performance & Valuation of THC
THC stock has surged 120.3% in the year-to-date period, significantly outpacing the industry’s rally of 32.1% and the S&P 500 Index’s growth of 20.1%. In comparison, its peers like HCA Healthcare, Inc. HCA and Select Medical Holdings Corporation SEM have gained 35.2% and 58.3%, respectively, during this time.
YTD Price Performance Comparison
Image Source: Zacks Investment Research
From a valuation perspective, Tenet Healthcare is trading only marginally higher than the industry despite the massive outperformance. Going by its price/earnings ratio, the company is trading at a forward earnings multiple of 14.48X, a bit higher than the industry average of 14.33X. The company has a Value Score of A.
Image Source: Zacks Investment Research
Encouraging Estimates for THC
The Zacks Consensus Estimate for THC’s 2024 and 2025 EPS implies a 63.2% and 3.6% uptick on a year-over-year basis, respectively. Encouragingly, the company is also witnessing northbound estimate revisions for the current and the next year. Similarly, the consensus mark for 2024 and 2025 revenues suggests a 1% and 3% increase, respectively.
Image Source: Zacks Investment Research
Final Thoughts: Buy THC Now
Considering the positive factors discussed, Tenet Healthcare is certainly a stock to keep in your long-term investment portfolio. Currently, it trades below the Wall Street average price target of $184.16 per share, indicating a 13.4% upside from current levels.
Image Source: Zacks Investment Research
THC has recently broken above its 50-day moving average, signifying a bullish trend.
Tenet Healthcare's focus on strategic capacity expansion and favorable industry trends position it for robust future growth. The company’s solid transformative effortsand recent upward revisions in estimates suggest a promising outlook. These factors make THC a compelling buy at current price levels for investors looking for a solid long-term investment in the growing healthcare sector.
Tenet Healthcare currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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