Tenet Healthcare Corp.

Transcription

1 March 04, 2015 Tenet Healthcare Corp. Current Recommendation Prior Recommendation Neutral Date of Last Change 03/04/2015 Current Price (03/03/15) $47.06 Target Price $43.00 UNDERPERFORM (THC-NYSE) SUMMARY Tenet Healthcare s fourth quarter earnings missed the Zacks Consensus Estimate but increased year over year on high admissions, growth in the Conifer business, and economic improvement from strategies taken to gain market share. However, high financial leverage and expenses were setbacks. Nevertheless, incremental synergies from acquisitions, higher revenues and growth in the outpatient business are positives. The Vanguard acquisition, implementation of the ACA and an impressive inorganic profile are expected to be accretive to earnings. Though the overhang of lawsuits raise concern, product launches and addition of new outpatient facilities and hospitals are impressive. However, the CMS 1% reduction in payments for hospitals is expected to weigh on revenues going forward. SUMMARY DATA 52-Week High $ Week Low $38.75 One-Year Return (%) 7.08 Beta 2.05 Average Daily Volume (sh) 1,565,813 Shares Outstanding (mil) 98 Market Capitalization ($mil) $4,612 Short Interest Ratio (days) 5.08 Institutional Ownership (%) 97 Insider Ownership (%) 3 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 11.0 Earnings Per Share (%) 0.6 Dividend (%) N/A using TTM EPS 32.7 using 2015 Estimate 23.5 using 2016 Estimate 17.0 Zacks Rank *: Short Term 1 3 months outlook 5 - Strong Sell * Definition / Disclosure on last page Risk Level * Average, Type of Stock Large-Growth Industry Med-Hospitals Zacks Industry Rank * 115 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,594 A 2,422 A 2,408 A 3,885 A 11,309 A ,306 A 4,042 A 4,179 A 4,468 A 16,995 A ,331 E 4,325 E 4,399 E 4,483 E 17,538 E ,353 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.33 A $0.66 A $0.45 A $0.43 A $1.87 A $0.12 A $0.17 A $0.36 A $1.03 A $1.44 A 2015 $0.31 E $0.44 E $0.45 E $0.80 E $2.00 E 2016 $2.77 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved North Canal Street, Chicago IL 60606

2 OVERVIEW Founded in 1967 and headquartered in Dallas, TX, Tenet Healthcare Corp., is an investor-owned health care services company, which owns and operates general hospitals and related health care facilities for urban and rural communities in numerous states, and has offices in CA and FL. The company has investments in other health care companies and is one of the largest investor-owned health care delivery systems in the U.S. Tenet Healthcare and its subsidiaries provide healthcare services primarily through general hospitals and related healthcare facilities. Its hospitals offer acute care services, operating and recovery rooms, radiology services, respiratory therapy services, clinical laboratories, and pharmacies; intensive care, critical and coronary care units; physical therapy along with orthopedic, oncology, and outpatient services. The related health care facilities include rehabilitation hospitals, specialty hospitals and longterm care facilities. The company receives revenues for patient services from a variety of sources, primarily managed care payers and the federal Medicare program as well as state Medicaid programs, indemnity-based health insurance companies and self-pay patients (patients who do not qualify for government programs payments like Medicare and Medicaid and do not possess some form of private insurance and are therefore responsible for their own medical bills). As of Dec 31, 2014, Tenet Healthcare operated through 77 acute care hospitals. These hospitals have 20,407 licensed beds, 214 outpatient centers and 6 health plans, and serve urban and suburban communities. REASONS TO SELL Tenet Healthcare serves a large number of uninsured and underinsured patients with a high burden of co-payments and deductibles. Consequently, the company has a high level of uncollectible accounts and rising bad debts, due to which Tenet Healthcare has been increasing the provision for doubtful debts at a four-year CAGR of 8.7% for Although it declined marginally to $730 million in 2011, provision for doubtful debts again surged to $785 million in 2012 and 23.8% to $972 million in It further increased a significant 49.7% year over year to $1.3 billion in Tenet Healthcare expects a high level of uncollectible accounts in the coming years as well. Tenet Healthcare has been experiencing high levels of operating expenses in the past few years. The impact of industry-wide and company-specific challenges, including a decline in volumes and demand for inpatient cardiac procedures along with high levels of bad debt, has led operating expenses to increase at a three-year CAGR of 9.7% from $7.2 billion in 2010 to $9.5 billion in Operating expenses also increased 49.5% to $14.8 billion in 2014 on account of higher salaries, wages and benefits, supplies and other operating expenses. Until physician employment streamlines and patients fill out the office practices, there would be least improvement in the scenario. Increase in information technology service contract expenses related to the HIT implementation program, malpractice expenses, physician relocation costs, hospital provider fees, annual salary hikes and employee benefits further weigh on the margins from time to time. After reporting regular improvement since 2010, inpatient revenues started declining from the beginning of It declined 4.4% in the first quarter of 2013 and 0.4% in the second quarter of Although inpatient revenue stabilized with 0.1% growth in the third quarter of 2013 it again declined 1.5% in the fourth quarter as per company expectations. This lead to a 1.6% year over year decline in inpatient revenues in 2013, along with a decline in adjusted admissions. Although inpatient revenues increased in 2014, the CMS implementation of a 1% decrease in payments for hospitals is Equity Research THC Page 2

3 expected to weigh on inpatient revenues going forward. This is further expected to dampen inpatient revenues for Tenet Healthcare. Tenet Healthcare is a highly leveraged company with approximately $11.7 billion long-term debt at the end of 2014 against shareholders equity of merely $785 million. This implies a long-term debt-toequity ratio of 14.9x, deteriorating from 12.2x at the end of 2013, thereby increasing financial risk. The company also regularly refinances debt through tender offers and exchange offers and repurchases debt through privately negotiated transactions and open market repurchases. Tenet Healthcare deploys a substantial part of its cash flow to pay the interests on its debts and thus is left with limited funds to utilize for its operations, growth initiatives or capital expenditures. In fact, operating cash flows dropped 0.6% in Although cash from operations increased in 2014, we remain cautious about any substantial improvement in the future, given the latest debt issuances. Moreover, due to increasing financial leverage, the company could face problems in procuring funds for its working capital requirements. To keep the operations going and to keep the financial leverage and interest burden in control, these debts require prudent financing. RISKS Tenet Healthcare has been generating consistent growth in operating revenues, which increased at a four-year CAGR of 8.2% from 2009 to Net operating revenue further increased by 49.7% in 2014 and also exceeded the company-guided range on account of higher patient volumes, improvement in terms of the commercial managed care contracts, and better performance in the Conifer services business. Additionally, the approval of the California Provider Fee program in the fourth quarter of 2014 led to the contribution of $165 million in revenues, higher than the projected $140 million. Outpatient business of Tenet Healthcare has been one of the highest contributors to revenues and has grown at a three-year CAGR of 24.2% from 2011 to 2014 owing to expansion of the outpatient network. The acquisition of nine outpatient businesses and the opening of 27 new outpatient facilities have brought the total outpatient center count to 214 at the end of Outpatient business comprised 37% of total revenues in 2014 and by expanding the outpatient business the company expects to increase its profitability over time. The acquisitions of Emanuel Medical Center in Turlock, CA, a majority stake in Texas Regional Medical Center at Sunnyvale, ambulatory surgery centers, urgent care centers, diagnostic imaging center and physician practice entities are expanding its operating capacity. Meanwhile, the Vanguard Health Systems (VHS) acquisition in Oct 2013 has helped the company to strengthen operations in Texas, Arizona, California, Illinois, Massachusetts and Michigan. The notable alliances that helped the company to improve operations include the long-term alliance with Blue Cross and Blue Shield of Illinois (BCBSI), Blue Cross Blue Shield of Texas (BCBSTX), Blue Cross Blue Shield Plan of Florida and contracts with industry biggies like TriWest Healthcare, Cigna, Aetna, United Healthcare, Humana and so on. Partnerships with VisiQuate Inc. in 2013 and University Health System, entered in Feb 2014 are boosting the revenue cycle management operations. In order to strengthen its Arizonian operations, Tenet Healthcare has entered into a three-way joint venture with Ascension Health and Dignity Health in Jul 2014, whereby it is slated to acquire Carondelet Health Network. Moreover, the establishment of Resolute Health Hospital in Jun 2014 and the pending JV with Baptist Health System in Birmingham, Alabama should help the company provide high quality healthcare at lower cost. Going ahead, the company hopes to continue acquiring hospitals and other health care assets to increase outpatient revenues. Tenet Healthcare consistently enhances business growth and optimizes its capital structure through financial and strategic plans. Tenet Healthcare announced a $500 million share repurchase authorization in Oct 2012, which was completed before its expiry at 2013-end. Since mid-2011, the company deployed $1.2 billion toward share buybacks, thus lowering the share count. The reverse stock split in Oct 2012 contributed to some accretion in the earnings per share due to reduced share Equity Research THC Page 3

4 count. Moreover, in the past, the company issued long-term debt worth $1.65 billion. In May 2013, Tenet Healthcare raised $1.1 billion in long-term secured notes, while $1.6 billion worth of senior notes were issued in 2014 in order to redeem old debt with higher coupon rate, capitalizing on the low interest rate environment to reduce borrowing costs. Given the long-term maturity aspect of the notes, there is no pressure related to this part of debt in the near term. Additionally, with establishment of the teaching hospital (expected to be completed by 2016) at El Paso, Tenet s planned investments in the community will exceed $550 million over a span of 10 years. Some provisions of the health care reform legislation signed in Mar 2010 are expected to impact hospital companies like Tenet Healthcare positively. The legislation aims to expand the pool of insured patients, which should aid hospitals' bottom line. Given the concentration of the company s operations in California, Florida and Texas, which historically have the higher percentages of uninsured and underinsured patients, Tenet Healthcare enjoys a strong competitive advantage in benefiting from extended insurance coverage. Further, owing to the Supreme Court s pending decision regarding the extension of cost-sharing subsidy to individuals purchasing coverage through federal government s health insurance exchange instead of state-based exchange, health insurance companies like Tenet Healthcare are slated to receive subsidies on behalf of consumers. We believe that the reforms should go a long way toward reducing bad debt problems associated with hospitals. Meanwhile, the implementation of healthcare information technology (HIT) solutions from Cerner Corporation since 2010 is enhancing clinical decision support and providing physicians immediate access to a patient's electronic health record, thereby improving the operational efficiencies and reducing the probability of medical errors. HIT incentives are expected to be around $65 million for Moreover, it is slated to benefit from the 2.1% increase in payment rates for IPF units per the final rule issued by CMS. Additionally, the company s efforts to create awareness among individuals about new coverage options and pathohealth.com, the company s website, has already led to the enrollment of people in exchange products and Medicaid and with the onset of the next enrollment period, Tenet Healthcare is expected to see a further surge in memberships. RECENT NEWS Tenet Healthcare Q4 Earnings Miss Estimates, Improve Y/Y Feb 23, 2015 Tenet Healthcare reported fourth-quarter 2014 operating earnings of $1.03 per share that missed the Zacks Consensus Estimate of $1.20. However, the results compared favorably with the year-ago quarter earnings of $0.43 per share. The year-over-year upside was driven by the strategies undertaken by the company to gain market share, economic improvement and expanded health coverage, higher admissions and growth in the Conifer business. Including post-tax impairments, restructuring charges, acquisition-related expenses, litigation and investigation expenses, net income of Tenet Healthcare in the reported quarter was $0.61 per share, comparing favorably with the year-ago loss of $0.17. Operational Update Net operating revenue of Tenet Healthcare came in at $4.5 billion beating the Zacks Consensus Estimate of $4.4 billion. Revenues were also up 15% from the prior-year quarter. The improvement was largely attributable to an increase in patient volume, improvement in terms of the commercial managed care contracts, better performance in the Conifer services business and higher contribution from the California Provider Fee program. Equity Research THC Page 4

5 Tenet Healthcare s net patient revenue per adjusted admission increased 6.8% year over year to $12,243. Total admissions increased 4% while adjusted admissions rose 4.5%, both on a year-over-year basis. Additionally, the area of strategic focus through surgeries increased 7.5% and emergency department visits grew 7.3%. As a percentage of revenues, bad debt expense ratio decreased 80 basis points year over year to 7.4%. Tenet Healthcare s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) improved 45.5% year over year to $646 million in the fourth quarter. Financial Position As of Dec 31, 2014, Tenet Healthcare had cash and cash equivalents of $193 million, up from $113 million as of Dec 31, The company exited 2014 with total assets amounting to $18.1 billion, up from $16.5 billion as of Dec 31, Shareholder equity as of Dec 31, 2014 was $651 million, down from $755 million as of Dec 31, Net cash inflow from operating activities in 2014 was $687 million, higher than $589 million in the yearago period. Tenet Healthcare s capital expenditure decreased to $199 million in the fourth quarter of 2014 from $293 million in the year-ago quarter. Guidance First Quarter of 2015 Adjusted EBITDA for the first quarter is expected in the range of $475 $525 million. Tenet Healthcare expects earnings per share for the quarter to be between $0.05 and $0.55. Net operating revenue is guided in the range of $4.3 $4.5 billion Tenet Healthcare s board of directors of provided the adjusted EBITDA outlook for 2015 in the range of $2.05 $2.15 billion. Earnings per share is projected between $1.32 and $2.40. Net operating revenue for 2015 is expected between $17.4 billion and $17.7 billion. Tenet Healthcare expects its adjusted net cash flow in 2015 to be in the range of $1.15 $1.25 billion. Adjusted free cash flow is anticipated in the range of $150 $350 million. Equity Research THC Page 5

6 VALUATION Tenet Healthcare shares currently trade at 23.5x our earnings estimate for 2015, a 13% discount to the 26.9x industry average. Our six-month target price of $43.00 per share equates to about 21.5x our earnings estimate for With no dividend supplement, this target price implies an expected negative return of 8.6% over that period. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Tenet Healthcare Corp. (THC) Industry Average S&P Community Health Systems Inc. (CYH) HCA Holdings Inc (HCA) Universal Health Services Inc. (UHS) Lifepoint Hospitals Inc. (LPNT) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Tenet Healthcare Corp. (THC) Industry Average S&P NA 2.0 NA Equity Research THC Page 6

7 Earnings Surprise and Estimate Revision History Equity Research THC Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of THC. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform %, Neutral %, Underperform 8.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Research Analyst Copy Editor Content Ed. Lead Analyst QCA Rageshree Bose Priyanka Bhattacharyya Meenakshi Sharma Meenakshi Sharma Tanuka De Equity Research THC Page 8