In this article, let's take a look at Tenet Healthcare Corp. (THC), a $5.88 billion market cap company, which is one of the largest U.S. for-profit hospital managers, in an extremely fragmented industry.
The company is one of the largest private hospital operators. With an extraordinary gain in market share in fast-growing urban markets like Texas, California, and Georgia, it seems to have an effective expansion plan.
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The population that will be the fastest-growing segment is the one of 65 or more years old, and is the one that is going to increase in the next years. This is very important for a health-care company. Additionally, the firm concentrates operations in Florida, the state with the highest expected concentration of individuals of that segment, so we expect Tenet to continue growing.
A Large Private Hospital
Tenet has better scale advantages than its public competitors, and the effect is lower costs. For example, the company reduces variability in treatment decisions. Keeping costs as well as capital expenditures should keep long-term profits.
Moreover, it has advantages from consolidated supply purchasing, advances in technology and corporate overhead functions.
The Largest Customer
The company faces significant reimbursement pressure from the U.S. government, which will continue to be its largest customer under Medicare and Medicaid.
Acquisition of Vanguard Health Systems
Last year it acquired Vanguard Health Systems, getting "the best acquisition team" in the industry, company president and CEO Trevor Fetter said.
As a matter of fact, it plans to expand into new markets and projects annual revenue around $15 billion. Also, we expect good synergies, as well as more efficiency and the decline in uninsured patients.
The firm is currently Zacks Rank #2 - Buy, a rating which indicates that the stock, over the next 1 to 3 months, will perform at an annualized rate of 18.84%, that should be attractive for investors.
Revenues, Margins and Profitability
Looking at profitability, revenue growth by 20.9% led earnings per share increased tremendously in the most recent quarter compared to the same quarter a year ago (about 79%). During the past fiscal year, Tenet reported -$1.20 versus $1.72 in the prior year. This year, Wall Street expects an improvement in earnings ($1.38 versus -$1.20).
Finally, let�s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
Community Health Systems Inc.
Universal Health Services Inc.
The company has a negative ROE which is lower than its peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Universal Health Services Inc. (UHS) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
In terms of valuation, the stock sells at a price-to-book ratio of 8x indicates a premium versus the industry average of 2.96x while the price-to-sales ratio of 0.4x is below the industry average of 1.55x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $34.484, which represents a 28.1% compound annual growth rate (CAGR).
As outlined in the article, Tenet Healthcare is one of the largest firms in the U.S., with operations in numerous states and enjoying more scale advantages than its public competitors which led to lower costs.
Although we found a weakness in the ROE analysis, the fact that is a buy according to Zacks-Rank makes me feel more comfortable on my bullish opinion on this stock.
Hedge fund gurus like George Soros and Louis Moore Bacon added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
This article first appeared on GuruFocus.