Tenet Healthcare (THC) moved up 18 spots in Barchart’s Top 100 Stocks to Buy Monday. It now sits in 67th spot with a weighted alpha of 119.97, higher than its 106% return over the past 52 weeks.
Whenever the weighted alpha is higher than the 52-week return, it indicates that the stock is experiencing near-term momentum and could be ready for an extended run.
Tenet owns acute care and specialty hospitals, outpatient facilities, emergency facilities and micro-hospitals, ambulatory surgery centers, surgical hospitals, and end-to-end service solutions for hospitals and other healthcare facilities.
Tenet's stock has risen 106% over the past 12 months, yet its biggest competitors haven’t done nearly as well. Tenet appears to have an advantage over these other companies.
Does that make it a buy? Recent investor interest says yes.
The Most Recent Earnings
Tenet reported its Q2 2024 earnings July 24 to the markets. Its stock has gained 10% in four consecutive days of trading since. It’s definitely on a roll.
First, it reported revenues and earnings that were better than Wall Street estimates.
On the top line, it had revenue of $5.1 billion, about $100 million higher than the consensus. On the bottom line, it earned $2.31 a share on an adjusted basis, 41 cents better than analyst expectations. For a stock that's covered by 18 analysts -- and 17 rate it a Buy (4.83 out of 5) -- those are impressive beats.
Second, it raised its guidance for 2024. On the top line, it now expects $20.8 billion in revenue at the midpoint of its guidance, $600 million higher than its previous guidance. On the bottom line, it expects adjusted earnings per share of $10.77.
"Our results through the second quarter, which have significantly exceeded our expectations, have been driven by volume and revenue growth as well as sustained fundamentally strong operating performance," said Saum Sutaria, M.D., Chairman and Chief Executive Officer of Tenet.
Its business appears to be operating at a high level of efficiency.
Its Valuation Remains Reasonable
Despite gaining 106% over the past year, it trades at just 14.2x its $10.77 EPS estimate. In recent years, it’s traded between 16-20x its normalized EPS, so from a historical perspective, it remains attractively priced.
One thing I look at to evaluate a company’s stock is free cash flow yield. It is defined as free cash flow divided by enterprise value.
Based on its guidance, Tenet expects $1.33 billion at the midpoint. Based on a current enterprise value of $29.32 billion, it has a free cash flow yield of 4.5%. I consider anything between 4% and 8% to be fair value.
However, the company’s estimate appears to be conservative based on its free cash flow for the first six months of the year, which is 39% higher year-over-year, to $948 million. Further, its trailing 12-month free cash flow according to Morningstar.com is $1.76 billion, a free cash flow yield of 6.0%.
Again, from a historical perspective, its free cash flow has never been better.
On its balance sheet, the company has net debt of $9.99 billion, or a reasonable 34% of its enterprise value. Of the $12.87 billion in long-term debt, about 50% doesn’t mature for five years or more.
It will continue to lower its long-term debt outstanding as earnings and free cash flow increase in the next few years.
The Company’s Growth Focus
Tenet has two operating segments: Ambulatory Care and Hospital Operations and Services. The former accounted for 22% of its $5.10 billion revenue in the second quarter while the latter accounted for 78%.
Despite generating just 22% of revenue, Ambulatory Care accounted for 47% of its adjusted EBITDA. It is the more profitable of the two segments -- Hospital Operations and Services had a 12.6% adjusted EBITDA margin in the second quarter, about one-third Ambulatory Care -- and it is where the growth is.
The Ambulatory Care business is run through United Surgical Partners International (USPI). Tenet merged its short-stay surgery and imaging center assets with USPI in 2015. It owned 50.1% of the joint venture. Tenet acquired the remainder over the next seven years, acquiring the final 5% for $406 million in the second quarter of 2022 from Baylor University’s Medical Center.
Since 2018, it has grown USPI revenue by a compound annual growth rate of 13.3%, with a 14.5% increase in adjusted EBITDA. From 2015 through 2024, its annual same-facility, system-wide revenue averaged 5.9%.
Doubling the number of facilities it has operated over the past six-and-a-half years, it does an excellent job acquiring facilities at a reasonable multiple—8-10x EBITDA—and then profitably growing them.
It’s a winning long-term growth strategy.
I can see why Tenet stock is on a roll. It appears it will stay that way.
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