'Irreconcilable Difference' Makes This Company Worth a Look

GuruFocus.com
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- By Mark Yu

Tenet Healthcare's (THC) largest shareholder, Glenview Capital Management, removed its two representatives from the hospital company's board, blaming "irreconcilable differences" over strategy. Nonetheless, the shareholder remained fully committed to its ownership interest in the $1.73 billion diversified health care services provider, according to the report.


Meanwhile, the Texas-based hospital operator reported a (-)3% revenue decline to $9.6 billion in its first-half operations and $68 million in profits before distribution to noncontrolling interests compared to $73 million a year earlier.

After distribution of $176 million to its noncontrolling interests, Tenet recorded (-)$108 million in losses for its shareholders in the first half compared to (-)$105 million in losses in the same period last year.

Tenet also provided several figures for its fiscal year 2017 outlook with (-)$90 million to (-)$120 million net losses for its shareholders (vs. (-)$192 losses in 2016); and an adjusted free cash flow in the range of $525 million and $725 million (vs. $380 million in 2016).


"While we experienced a softer volume environment in the second quarter, our teams responded well with solid performance on cost control, which mitigated the impact on our results.

"We are continuing to invest in targeted service lines and have largely completed four significant construction projects that will strengthen our position in four strategic hospital markets. We are also making progress on portfolio refinement, including completing the sale of our Houston-based hospitals and affiliated outpatient centers and redeploying that capital to increase our ownership position in USPI." - Trevor Fetter, chairman and CEO



Valuations

Tenet Healthcare has delivered continuous losses in recent quarters therefore leading to no trailing price-earnings (P/E) ratio. According to GuruFocus data, the company had a price-book (P/B) ratio of 4.6 times vs. the industry median of 2.54 times and a price-sales (P/S) ratio of 0.09 times vs. 1.69 times.

The company does not have a trailing dividend yield.

Average fiscal 2017 revenue and earnings-per-share estimates indicated forward multiples of 0.09 times and 21.2 times.

Total returns

Despite showing losses, Tenet outperformed the broader Standard & Poor's 500 index so far this year with 18.7% total gains vs. the index's 10.75%.

Tenet Healthcare

Tenet Healthcare was founded in 1967 and is a diversified health care services company.

According to filings, Tenet operates regionally focused, integrated health care delivery networks, primarily in large urban and suburban markets in the U.S.

In December 2016, Tenet operated 79 hospitals, 20 short-stay surgical hospitals, over 470 outpatient centers and nine facilities in the U.K. through subsidiaries, partnerships and joint ventures, including USPI Holding Co. Inc.

The company's Conifer Holdings Inc. subsidiary provides health care business process services in the areas of hospital and physician revenue cycle management and value-based care solutions to health care systems, individual hospitals, physician practices, self-insured organizations, health plans and other entities.

The health care industry

The health care industry in general - and specifically the acute care hospital business - are experiencing significant regulatory uncertainty based primarily on legislative efforts to significantly modify or repeal and potentially replace the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (Affordable Care Act or ACA).

It is difficult to predict the full impact of these actions on our future revenues and operations. Tenet believes its ultimate success in increasing its profitability depends in part on the company's success in executing its business strategies (1).

Tenet has three separate reportable operating segments - Hospital Operations and Other, Ambulatory Care and Conifer.

Hospital Operations and Other

In December 2016, Tenet's subsidiaries operated 79 hospitals - including three academic medical centers, two children's hospitals, two specialty hospitals and one critical access hospital - serving primarily urban and suburban communities in 12 states.

Tenet's Hospital Operations and Other segment also included 177 outpatient centers in December 2016, the majority of which are provider-based diagnostic imaging centers, freestanding urgent care centers, satellite emergency departments and provider-based ambulatory surgery centers (2).

In the first half, revenue in the segment fell (-)4.6% year over year to $8.2 billion (83% of unadjusted sales) and recognized an adjusted EBITDA margin of 8% compared to 9.8% a year earlier.

Ambulatory Care

The Ambulatory Care segment is comprised of the operations of Tenet's USPI joint venture and its nine Aspen facilities in the U.K. In December 2016, the USPI joint venture had interests in 239 ambulatory surgery centers, 34 urgent care centers, 21 imaging centers and 20 short-stay surgical hospitals in 27 states.

Revenue in the ambulatory care business grew 6.4% to $927 million (9% of sales) and registered an adjusted EBITDA margin of 34.2% (most profitable segment) compared to 31.6% a year earlier.

Conifer

The Conifer segment provides health care business process services in the areas of hospital and physician revenue cycle management and value-based care solutions to health care systems as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities.

In December 2016, Conifer provided services to more than 800 Tenet and non-Tenet hospitals and other clients nationwide (3).

Revenue in the Conifer grew 4% year over year to $802 million (8% of sales) and had margins of 15.6% compared to 16.3% a year earlier.

Selected operating statistics

Total admissions

Tenet's total admissions decreased by 3,504, or 1.8%, in the three months ended in June compared to the three months ended June 2016.

Total surgeries

Total surgeries decreased by 6,752, or 5.2%, in the three months ended in June compared to the 2016 period.

Emergency department visits

Emergency visits increased 1.3% in the three months ended June 2017 compared to the same period in the prior year.

Paying visits

In the recent quarter, paying visits excluding charity and uninsured declined by (-)2.5% to 1.85 million.

Ambulatory care cases

In the recent quarter, ambulatory care total cases increased 3.9% from a year earlier due to the increase in consolidated facilities.

Sales and profits

In the past three years, Tenet registered a revenue growth average of 20.9%.

Cash, debt and book value

As of June, Tenet had $475 million in cash and cash equivalents and $15.16 billion in debt with a debt-equity ratio of 40.6 times compared to 27.7 times a year earlier. Overall equity declined by (-)$150 million year over year and debt increased by $654 million.

Of Tenet's $24.3 billion assets 36.8% were identified as goodwill and intangible assets while book value declined (-)17% year over year to $2.84 billion.

Cash flow

In the first half, Tenet's cash flow from operations declined (-)31% year over year to $401 million brought mostly by lower profits and higher cash outflow in relations to its deferred income taxes, other items and accounts payables.

Capital expenditures were $348 million leaving $53 million in free cash flow compared to $169 million a year earlier. The company also reduced its debt by $221 million (net issuances).

Tenet also allocated 2.42 times its free cash flow in distributions and purchases of noncontrolling interests in the period.

The cash flow summary

In the past three years, Tenet allocated $1.53 billion in capital expenditures, raised $2.24 billion in debt net repayments and generated $743 million in free cash flow. The company also provided $40 million in share repurchases.

Conclusion

Setting aside the decision of Tenet's largest shareholders, the company's recent operations indicated a steady decline in its largest operations - hospital operations - in its capacity to generate revenue. This finding was probably further supported by lower admissions and surgeries in the recent six months.

Nonetheless, the company is increasing involvement in its lower revenue generator - USPI joint venture - now at 80% interest, while having divested three of its acute care hospitals and related operations in Houston as late as July 31.

Despite the continuous losses in recent years, analysts see an interesting positive earnings per share this fiscal year, contrary to Tenet's outlook.

Tenet also carries a leveraged balance sheet and has relatively provided a minimal amount as payouts to its shareholders in recent years.

Meanwhile, analysts have an average overweight recommendation on Tenet with $18.79 per share target price vs. $17.26 at the time of writing.

Inability to provide any profits for its shareholders in recent years accompanied by a leveraged balance sheet makes Tenet a pass.

Notes

1. Company filings

In general, these strategies are intended to address the following trends shaping the demand for health care services: (i) consumers, employers and insurers are actively seeking lower-cost solutions and better value as they focus more on health care spending; (ii) patient volumes are shifting from inpatient to outpatient settings due to technological advancements and demand for care that is more convenient, affordable and accessible; (iii) the industry is migrating to value-based payment models with government and private payers shifting risk to providers; and (iv) consolidation continues across the entire health care sector through both traditional acquisition and divestiture activities, as well as joint ventures.

2. Company filings

In addition, the company's subsidiaries owned or leased and operated: a long-term acute care hospital; a number of medical office buildings, all of which were located on, or nearby, the company's hospital campuses; approximately 650 physician practices; accountable care networks; various health plans, which Tenet intends to divest or wind down in 2017; and other ancillary health care businesses.

3. Company filings

In 2012, Tenet entered into agreements documenting the terms and conditions of various services Conifer provides to Tenet hospitals, as well as certain administrative services its Hospital Operations and other segment provide to Conifer.

Disclosure: I do not have shares in any of the companies mentioned.

This article first appeared on GuruFocus.


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