On Mar 14, 2013, we downgraded our recommendation on Tenet Healthcare Corp. (THC) to Neutral from Outperform based on increasing operating expenses and bad debt along with a high debt-to-capital ratio.
Why the Downgrade?
Tenet Healthcare reported fourth-quarter 2012 earnings from continuing operations of 52 cents per share, falling short of the Zacks Consensus Estimate of 69 cents.
Tenet Healthcare has been experiencing high levels of operating expenses in the past few years. Moreover, this Zacks Rank #3 (Hold) stock has a high level of uncollectible accounts and rising bad debts, due to which it increased the provision for doubtful debts from $487 million in 2006 to $785 million in 2012.
Further, Tenet Healthcare is a highly leveraged company with approximately $5.16 billion long-term debt at the end of 2012 compared with shareholders’ equity of only $1.14 billion. This implies a long-term debt-to-equity ratio of 4.53, posing ample financial risk.
Tenet Healthcare witnessed downward revision of 10 of 15 estimates over the last 30 days. The Zacks Consensus Estimates for 2013 declined 3.7% to $2.82.
Nevertheless, in the long-term, increasing operating revenues and growth through acquisitions are expected to be beneficial for Tenet Healthcare. Alliances and contract renewals also pay an important role in enhancing profitability.
In this regard, the renewal of the service contract with Cigna Corp. (CI) in 2012 is important as it is one of the largest contracts owned by the company. Moreover, the recent capital management plans are expected to enhance returns, capital structure and shareholder value of Tenet Healthcare.
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