On Mar 14, 2013, shares of Tenet Healthcare Corporation (THC) hit a 52-week high of $44.96. The company in fourth quarter 2012 managed to recover from the loss posted in the year-ago period. Tenet delivered positive earnings surprise in 2 out of 4 quarters in 2012 with an average beat of 28.91%. It has been delivering consistent earnings growth for the past 9 years, including 2012.
On Feb 26, 2013, Tenet reported fourth-quarter 2012 earnings from continuing operations of 52 cents reversing the loss of 55 cents in the year-ago quarter. Results were driven by improved revenues and controlled expenses.
Top-line growth for Tenet was 5.4% in 2012. Strong volume growth coupled with improved pricing was responsible for the improvement.
Tenet has also been working toward enhancing its portfolio through acquisitions and strategic liaisons. The renewal of the service contract with Cigna Corp. (CI), effective May 1, 2013 is likely to enhance its operations. Additionally, in Jan 2013, Tenet announced a joint venture with the non-profit healthcare organization John Muir Health and restored ties with Healthnet Inc. (HNT). In Feb 2013, Tenet decided to acquire Emanuel Medical Center to widen its integrated healthcare network.
During its earnings release, Tenet guided operating income to be about $835–$965 million in 2013. Consequently, adjusted earnings per share for 2013 were guided at $2.31–$3.31 for 2013. The Zacks Consensus Estimate for 2013 of $2.82 per share is within the company’s guidance. The estimate represents a year-over-year increase of 65.88%.
However, valuation looks stretched for Tenet. The shares are trading at a 6.7% premium to the peer group average on a forward price to earnings basis, while at a considerable premium to the peer group average on a price to book basis. The return on equity is 5.2% above the peer group average. Nevertheless, the 1-year return from the stock is 98.12%, much above S&P 500’s return of 11.15%.
In the long-term, increasing operating revenues and growth through acquisitions are expected to be beneficial. Moreover, the recent capital management plans are expected to enhance returns, capital structure and shareholder value. Overall, we believe that strong organic and inorganic growth can help boost the future earnings outlook.
The overall long-term expected earnings growth rate for this stock is 10.25%.
Tenet currently carries a Zacks Rank #3 (Hold). Another healthcare services company Coventry Healthcare Inc. (CVH) carries a Zacks Rank #2 (Buy) and is worth noting.
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