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Bargain or Bust? Decoding Tenet Healthcare Stock's Lower Valuation
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Hospital company Tenet Healthcare Corporation (THC - Free Report) is trading comparatively cheap at the moment from a valuation standpoint. Its forward earnings multiple of 14.75 is lower than the industry average of 16.18. The stock also looks attractively valued relative to other medical facility operators like HCA Healthcare, Inc. (HCA - Free Report) and Encompass Health Corporation (EHC - Free Report) , with forward 12-month P/E of 16.62X and 21.33X. Tenet Healthcare has a Value Score of A.
Image Source: Zacks Investment Research
Tenet Healthcare’s cash flow situation is also encouraging. In the trailing 12-month period, THC’s free cash flow grew 16.5% to $1.89 billion. Going by its price-to-free cash flow (P/FCF), a reliable indicator of a company’s financial health, THC is trading at 8.42X, intriguingly below the industry’s average of 16.33X.
Image Source: Zacks Investment Research
With the stock currently trading at a discount, we explore Tenet Healthcare’s growth drivers and challenges to assess whether it's a smart investment opportunity for investors right now.
THC’s De-Leveraging Efforts Paying Off
Tenet’s long-term debt, net of the current portion, dropped to $12.8 billion by the second-quarter end, marking a 14.2% reduction since Dec. 31, 2023. The company closed the quarter with $2.9 billion in cash and equivalents, more than double what it had at the end of 2023. Thanks to its de-leveraging efforts, its net debt to EBITDA is brought down to 2.71X, well below its five-year median of 4.81X and the industry average of 3.34X.
It is likely to continue divesting its non-core and less profitable units to repay debt and free up capital. Earlier this month, it completed the divestment of its 70% majority ownership in Brookwood Baptist Health to Orlando Health. The transaction was expected to be valued at approximately $910 million in cash.
Image Source: Zacks Investment Research
THC’s Earnings Estimates & Surprise History
The Zacks Consensus Estimate for 2024 adjusted earnings for THC is currently pegged at $10.72 per share, indicating a 53.6% year-over-year surge. The consensus mark for 2025 suggests a further 2.9% jump. The consensus estimate for 2024 and 2025 revenues suggests 1.2% and 3.4% year-over-year growth, respectively.
It beat earnings estimates in each of the past four quarters, with an average surprise of 58.5%.
Tenet Healthcare Corporation Price and EPS Surprise
Tenet Healthcare is sharpening its focus on ambulatory surgery centers (ASCs) to capitalize on the increasing demand for outpatient services. In partnership with United Surgical Partners International, the company is expanding its network, optimizing operations, and targeting improved profit margins. By the end of the second quarter, Tenet Healthcare held interests in 520 ASCs and 24 surgical hospitals.
Its strategic initiatives are expected to enhance margin growth and continue increasing free cash flow, contributing to a more diversified business model that is better positioned to withstand political and regulatory shifts, reducing risk for investors. Its Conifer unit’s ability to retain and forge new revenue cycle management contracts will ensure a steady stream of revenue.
The company is also investing in AI-powered technologies to streamline both clinical and administrative processes, which should help lower costs, reduce patient wait times, and boost patient satisfaction.
Tenet Healthcare has expanded its workforce, thanks to a stabilizing labor market and effective staffing strategies. This has allowed the company to restore services previously impacted by pandemic-related disruptions and increase its capacity to meet rising healthcare demands.
Looking ahead, the company is well-positioned to benefit from the growing demand for hospital services, driven by an aging population and the increasing prevalence of chronic conditions. Tenet Healthcare plans to seize this opportunity through strategic acquisitions and the development of new facilities.
Why THC Stock Isn't a Buy Despite Its Discount
Tenet Healthcare is facing rising operating expenses despite efforts to manage costs. In 2023, the cost of supplies increased 9.7%, followed by a 3% rise in the first half of 2024. Other operating expenses rose 12.9% last year and 3.8% in the first half of this year. Salaries, wages and benefits increased 3.4% in 2023 and 2.8% in the first quarter of 2024, with a decline of 5.1% in the second quarter. While improvements in staffing may help, the growing utilization of resources is expected to push operating costs even higher, potentially squeezing margin growth.
One area of concern is the company's Return on Invested Capital, which stands at 7.88X, well below the industry average of 12.64X. This indicates that Tenet Healthcareis struggling to generate competitive returns on its invested capital compared to its peers.
Although the stock seems cheaper compared to the industry average, its current valuation exceeds its five-year median of 11.91X, indicating that the stock may be overvalued based on its historical averages.
The stock has already surged 113.9% year to date, outperforming both the industry average of 49.1% and the S&P 500’s 22.5% increase, suggesting that much of the positive outlook is already reflected in the current price. This limits the potential for substantial short-term gains. As a result, prospective investors may want to remain on the sidelines and wait for a more favorable entry point. However, existing shareholders with a long-term investment horizon should consider holding onto the stock.
Image: Bigstock
Bargain or Bust? Decoding Tenet Healthcare Stock's Lower Valuation
Hospital company Tenet Healthcare Corporation (THC - Free Report) is trading comparatively cheap at the moment from a valuation standpoint. Its forward earnings multiple of 14.75 is lower than the industry average of 16.18. The stock also looks attractively valued relative to other medical facility operators like HCA Healthcare, Inc. (HCA - Free Report) and Encompass Health Corporation (EHC - Free Report) , with forward 12-month P/E of 16.62X and 21.33X. Tenet Healthcare has a Value Score of A.
Tenet Healthcare’s cash flow situation is also encouraging. In the trailing 12-month period, THC’s free cash flow grew 16.5% to $1.89 billion. Going by its price-to-free cash flow (P/FCF), a reliable indicator of a company’s financial health, THC is trading at 8.42X, intriguingly below the industry’s average of 16.33X.
With the stock currently trading at a discount, we explore Tenet Healthcare’s growth drivers and challenges to assess whether it's a smart investment opportunity for investors right now.
THC’s De-Leveraging Efforts Paying Off
Tenet’s long-term debt, net of the current portion, dropped to $12.8 billion by the second-quarter end, marking a 14.2% reduction since Dec. 31, 2023. The company closed the quarter with $2.9 billion in cash and equivalents, more than double what it had at the end of 2023. Thanks to its de-leveraging efforts, its net debt to EBITDA is brought down to 2.71X, well below its five-year median of 4.81X and the industry average of 3.34X.
It is likely to continue divesting its non-core and less profitable units to repay debt and free up capital. Earlier this month, it completed the divestment of its 70% majority ownership in Brookwood Baptist Health to Orlando Health. The transaction was expected to be valued at approximately $910 million in cash.
THC’s Earnings Estimates & Surprise History
The Zacks Consensus Estimate for 2024 adjusted earnings for THC is currently pegged at $10.72 per share, indicating a 53.6% year-over-year surge. The consensus mark for 2025 suggests a further 2.9% jump. The consensus estimate for 2024 and 2025 revenues suggests 1.2% and 3.4% year-over-year growth, respectively.
It beat earnings estimates in each of the past four quarters, with an average surprise of 58.5%.
Tenet Healthcare Corporation Price and EPS Surprise
Tenet Healthcare Corporation price-eps-surprise | Tenet Healthcare Corporation Quote
THC’s Growth Drivers
Tenet Healthcare is sharpening its focus on ambulatory surgery centers (ASCs) to capitalize on the increasing demand for outpatient services. In partnership with United Surgical Partners International, the company is expanding its network, optimizing operations, and targeting improved profit margins. By the end of the second quarter, Tenet Healthcare held interests in 520 ASCs and 24 surgical hospitals.
Its strategic initiatives are expected to enhance margin growth and continue increasing free cash flow, contributing to a more diversified business model that is better positioned to withstand political and regulatory shifts, reducing risk for investors. Its Conifer unit’s ability to retain and forge new revenue cycle management contracts will ensure a steady stream of revenue.
The company is also investing in AI-powered technologies to streamline both clinical and administrative processes, which should help lower costs, reduce patient wait times, and boost patient satisfaction.
Tenet Healthcare has expanded its workforce, thanks to a stabilizing labor market and effective staffing strategies. This has allowed the company to restore services previously impacted by pandemic-related disruptions and increase its capacity to meet rising healthcare demands.
Looking ahead, the company is well-positioned to benefit from the growing demand for hospital services, driven by an aging population and the increasing prevalence of chronic conditions. Tenet Healthcare plans to seize this opportunity through strategic acquisitions and the development of new facilities.
Why THC Stock Isn't a Buy Despite Its Discount
Tenet Healthcare is facing rising operating expenses despite efforts to manage costs. In 2023, the cost of supplies increased 9.7%, followed by a 3% rise in the first half of 2024. Other operating expenses rose 12.9% last year and 3.8% in the first half of this year. Salaries, wages and benefits increased 3.4% in 2023 and 2.8% in the first quarter of 2024, with a decline of 5.1% in the second quarter. While improvements in staffing may help, the growing utilization of resources is expected to push operating costs even higher, potentially squeezing margin growth.
One area of concern is the company's Return on Invested Capital, which stands at 7.88X, well below the industry average of 12.64X. This indicates that Tenet Healthcareis struggling to generate competitive returns on its invested capital compared to its peers.
Although the stock seems cheaper compared to the industry average, its current valuation exceeds its five-year median of 11.91X, indicating that the stock may be overvalued based on its historical averages.
The stock has already surged 113.9% year to date, outperforming both the industry average of 49.1% and the S&P 500’s 22.5% increase, suggesting that much of the positive outlook is already reflected in the current price. This limits the potential for substantial short-term gains. As a result, prospective investors may want to remain on the sidelines and wait for a more favorable entry point. However, existing shareholders with a long-term investment horizon should consider holding onto the stock.
THC's Price Performance
Tenet Healthcare currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.