Tenet Stock: better with conifers, but expensive at the moment



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Health care principle (NYSE: THC) is one of the most highly regarded healthcare companies in the world. It was founded in 1975 and is a Fortune 500 company. THC recently announced that it had dropped its plan to spin off Conifer. As a result, the company avoided a temporary erosion of its revenue, adjusted EBITDA and potential opportunity cost in growth. healthcare revenue cycle management market. Currently, THC is showing exceptional operating and net margin growth, albeit at the expense of massive layoffs and the sale of its assets. Transforming THC to become more than a hospital business will provide long-term value, however, it already appears to be priced in at today’s price. In addition, the drop in the admission rate due to COVID-19, which peaked in January this year, combined with declining human resources, the number of installations and the uncertainty of Conifer’s declining revenue, makes this company an attractive short candidate.

“More than a hospital business”

THC: diversified business portfolio

THC: diversified business portfolio (tenethealth.com)

One of the aspects highlighted by THC by management is their diverse business portfolio. According to them, THC is well on its way to shifting the company’s focus to ambulatory care, also known as ambulatory care, from hospital operations, as seen in the image above. A value-added catalyst for THC is its growing medical-related installs, which grew to 423 in fiscal 2021 from 396 in fiscal 2020. Currently, this segment generated $2,718 million. in revenue, or 14% of its total revenue, and posted exceptional growth of 31% to $2,072 million in 2020.

Examination of its attributable adjusted EBITDA of $1,197 million, or 34% of its total revenue, reveals a 38% increase over the $868 million of the previous year. THC, in my view, is making a prudent move in abandoning its Conifer divestiture plan and instead capitalizing on the growing management of the healthcare revenue cycle by focusing on digital and automated healthcare. This promotes an improved customer experience without compromising the company’s margin. These two catalysts can provide significant revenue and adjusted EBITDA for the company, thus invalidating my thesis.

Growing margin but…

Another catalyst for added value is its growing operating margin and net margin.

THC: Trends in operating margin and net margin over a period of 5 years

THC: Operating margin and net margin trends over a 5-year period (Data from Seeking Alpha. Prepared by InvestOhTrader)

Reviewing these metrics, along with THC’s current revenue growth of 10.46% YoY and ROE of 173.3%, will provide a strong bullish catalyst for the company. However, a closer look at the origin of this 13.15% growth reveals that part of the growth resulted from massive layoffs and the elimination of fixed rent charges associated with the sale of hospitals. According to management, they suffered a decline in salaries, wages and benefits in fiscal 2021 of $2,188 million, compared to $2,225 million last year, and a total rent/lease charge. of $98 million, down from $102 million last year. Their total number of employees in fiscal 2021 was 88,968, compared to 97,900 in 2020 and 101,104 in 2019 and, therefore, this could slow down THC’s growth potential.

In addition to this, the main contributor to THC’s revenue, the Hospital Operation segment, had a decreasing number of hospitals, which may also hamper its growth potential. According to the management, they have finalized the sale of 5 hospitals, bringing its number of operations down to 60 hospitals as of fiscal year 2021. In addition to this, this has led to a drop in the number of licensed beds to 15,379 as of this day, compared to 17,178 last year. Selling facilities during the new normal and potential pandemic recovery is, in my opinion, a bad idea that could lead to tighter competition, as with Universal Health Services, Inc. (UHS). UHS has successfully increased its inpatient facilities to 363 this fiscal year from 360 last year, while THC has a decreasing number of health facilities at 535 this fiscal year from 550 last year.

Expensive so far

THC: relative rating

THC: relative valuation (data from SeekingAlpha.com. Prepared by InvestOhTrader)

Community Health Systems, Inc. (CYH), HCA Healthcare, Inc.. (HCA)

In addition to the declining operating metrics I mentioned above, THC is trading relatively more expensive than its peers. Its rear P/E is expensive compared to its front P/E of 14.60x, and the latter is also expensive compared to its peers’ front P/E of 11.46x. While the average rear P/S of its peers appears to be undervalued relative to its forward metric, THC’s forward P/S of 0.47x is unattractive relative to its rear P/S. With an implied P/E ratio of 10.38x, estimated FY2024 earnings per share of $8.48, and a discount rate of 10%, we can arrive at an implied fair price of $66.

Potential bearish divergence

THC: weekly chart

THC: weekly chart (TradingView.com)

As of today, THC is printing weaker price action with potential bearish divergence from its MACD indicator. A breakdown of its 20-day simple moving average may indicate bearish price action that will confirm a potential bearish setup. I think the consolidation above $70 will be an important support to watch.

Final takeaways

THC benefits from a credit rating upgrade from Moody’s on its unsecured debt, which was upgraded from Caa1 to B3 in March 2022, but remains speculative. Management also reassures that THC will maintain its liquidity, as shown below.

Assuming about $1.5 billion of free cash flow as a baseline to build on in 2023 and beyond, we believe that, and our capital structure, including about $3 billion of debt capacity collateral currently available, and no outstanding borrowing under our line, provides us with a great deal of flexibility as we consider future capital deployment options. Source: Q4 2021 Earnings Call

The THC has seen a slowdown in grant revenue implying that health care is no longer a priority for the US government as they shifted more of their budget to its National Defense in the midst of the conflict between Russia and Ukraine.

Finally, THC expects its adjusted EPS to decline to around $6.46 for fiscal 2022 from $7.58 last year. As of this writing, THC has 3 million shares available for short sale at a borrowing fee of 0.29%, with short interest increasing to 4.702 million shares by February 2022 from 3.664 million shares in January. Buying put options at the current price is also a viable trading plan, given the current weakness in THC.

Thanks for reading and good luck!

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