We have retained our Neutral recommendation on Tenet Healthcare Corp (THC) as declining admissions, rising bad debt and increasing operating expenses are likely to weigh on the positives of the company. This healthcare services company currently carries a Zacks Rank #3 (Hold).
Why the Reiteration?
Tenet has managed to deliver positive earnings surprise in two out last four quarters with an average beat of 17.75%.
The company serves a large number of uninsured and underinsured patients with a high burden of co-payments and deductibles. Tenet thereby encounters a high level of uncollectible accounts and rising bad debts. This has led to an increase in the provision for doubtful debts over the years. The trend is expected to continue in the upcoming quarters owing to the constantly increasing number of uninsured patients.
Additionally higher operating expenses have also been a matter of concern for Tenet. 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 by almost 8% since 2007. Expenses are expected to surge until physician employment streamlines and patient fills out in their office practices, thus weighing on margins.
Nevertheless, Tenet’s improved operating revenues have contributed generously to bottom line growth over the years. With an improvement in managed care pricing and a favorable shift in managed care payer mix the trend is expected to persist in the upcoming period. Moreover the pending acquisitions of Vanguard Health Systems (VHS) and Emanuel Medical Center are expected to widen the company’s healthcare network and bolster revenues further.
Tenet also works to reduce its share count through share repurchases. Since 2011, the company has deployed $892 million towards share buyback, thus lowering the share count by nearly 30%. Going ahead, the planned share buyback is expected to enhance earnings per share and boost shareholder value further.
However, the rising debt levels and the overhang of litigation settlements are other matters that raise concern.
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