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Glenview Ups Stake in Tenet: Possible Indicators for the Future

On Oct. 3, Larry Robbins (Trades, Portfolio) increased Glenview Capital Management's stake in Tenet Healthcare Corp. (NYSE:THC) by 1.34%, bringing the hedge fund's total position to 19,961,353 shares.


Robbins is the founder and CEO of Glenview Capital Management, a New York-based hedge fund that manages $8 billion in assets. He is known for posting high losses alongside double-digit gains.

Tenet Healthcare is a Dallas-based Medical Care company that owns 65 acute-care and specialty hospitals throughout the United States, as well as supporting facilities such as imaging centers, ambulatory surgery centers and off-campus emergy departments and micro-hospitals. This buy marks the latest increase in Glenview's holding of Tenet Healthcare, which it has been steadily purchasing more of since the first quarter of 2012. Glenview now holds 19.29% of the company's stock.

This steady purchase history from Glenview, combined with higher revenue than two-thirds of competitors in the medical care industry and seemingly undervalued stock, may make it an attractive option to some investors.

However, Tenet Healthcare has a few red flags worth noting for any investors looking into buying, such as low interest coverage and an inability to turn a consistent net profit. These issues may render the company unable to remain competitive in the long term.

The debt problem

Tenet Healthcare began reporting debt in 2007, and by 2010, the company's interest coverage dropped to 1.34. Its current interest coverage is at 1.56, which is lower than 88.13% of companies in the medical care industry. At 0.02, its cash-to-debt ratio fares even worse, ranking below 92.31% of industry competitors.

Although its revenue in the past five years has ranged from $11.08 billion to $19.6 billion, its corresponding net income is startlingly low in comparison, ranging from a loss of $704 million to a gain of $12 million as shown in the chart below. The company has been losing money for most of the past 10 years, and it has an overall weak balance sheet.

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The disparity between revenue and net income is mostly due to the high cost of the company's goods and operations, which holds true for its competitors as well. Tenet currently has an operating margin of 8.52%, which is higher than 51.69% of industry competitors and close to a historical high for the company itself, but still leaves little room for the company to tackle its debt.

Cutting costs and raising revenue

As part of an initiative to cut operating expenses by $200 million, Tenet Healthcare plans to consolidate its Dallas-area offices into a cheaper central location in Farmers Branch, Texas. Employees are scheduled to begin moving to the new location around the end of 2019.

Although the company has been suffering net losses for most of the past 10 years, its forward price-earnings ratio is 7.3, which is higher than 95.08% of industry competitors. According to Morningstar analysts, Tenet's earnings per share will increase to $1.36 in 2020 and $2.63 in 2021 as part of a broad increase in the demand for medical care in the United States. As baby boomers age and retire, their medical care needs are predicted to create unprecedented business opportunities for health care providers.

Undervalued

There are many things to consider when determining if a company is undervalued. Tenet currently does not have a price-earnings ratio, but its forward price-earnings ratio of 7.3 means analysts predict it will be undervalued once it begins turning a profit again. However, due to having a negative net income, one might argue that the stock could not be more overvalued.

Perhaps Tenet is indeed undervalued, especially when one considers the outlook for medical care demand in the coming years. However, being undervalued does not necessarily mean that a stock will correct to its intrinsic value; it is equally possible for the intrinsic value to drop instead.

The fact remains that despite plans to cut costs and high potential for growth in the medical care industry, Tenet Healthcare is a high-debt company with higher operating costs than most of its competitors. With no economic moat to fall back on and with revenue per share continuing its three-year decline, Tenet Healthcare has limited potential to make external market conditions work in its favor.

Disclosure: Author owns no positions in any of the stocks mentioned.

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This article first appeared on GuruFocus.