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Tenet (THC) Down 3.9% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Tenet Healthcare (THC). Shares have lost about 3.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Tenet due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Tenet Healthcare's Q1 Earnings Beat, Revenues Up Y/Y

Tenet Healthcare reported first-quarter 2023 adjusted earnings of $1.42 per share, which outpaced the Zacks Consensus Estimate by 22.4% and exceeded management’s expectations. However, the bottom line plunged 25.3% year over year.

Net operating revenues of $5,021 million rose 5.8% year over year in the quarter under review and outperformed the management’s estimate. The top line beat the consensus mark by 4%.

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The strong results stemmed from a well-performing Ambulatory Care segment, expanding patient volumes within the Hospital Operations segment and a moderated pace of contract labor costs.

Q1 Performance

Adjusted net income from continuing operations of Tenet Healthcare tumbled 26.7% year over year to $154 million and surpassed management’s expectations. Adjusted EBITDA of $832 million declined 6.3% year over year in the first quarter.

Operating expenses increased 7.8% year over year to $4,471 million mainly due to increased salaries, wages and benefits coupled with higher supplies and other operating expenses. Also, the metric came higher than our estimate of $4,323.9 million.

Segmental Details

Hospital Operations and Other – The segment reported net operating revenues of $3,899 million in the quarter under review, up 2.7% year over year. The reported figure outpaced the Zacks Consensus Estimate of $3,802 million and our estimate of $3,778.4 million. The unit benefited on the back of growing adjusted admissions.

On a same-hospital basis, net patient service revenues inched up 1.1% year over year to $3,547 million.

Adjusted EBITDA of $405 million dropped 21.2% year over year in the first quarter but beat the consensus mark of $362 million. The metric suffered a blow due to declining COVID-related volume and acuity.

Ambulatory Care - Net operating revenues advanced 22.6% year over year to $905 million, higher than the Zacks Consensus Estimate of $829 million and our estimate of $838.1 million. Solid same-facility net surgical case growth, buyouts, the inauguration of new facilities, service line growth and higher pricing yield contributed to the segment’s performance.

Adjusted EBITDA climbed 20.6% year over year to $340 million in the first quarter and beat the consensus mark of $285 million. The metric received an impetus from prudent cost-curbing initiatives.

Conifer – The segment’s net operating revenues of $324 million remained flat year over year in the quarter under review. However, the reported figure surpassed the Zacks Consensus Estimate as well as our estimate of $321 million.

Adjusted EBITDA slid 5.4% year over year to $87 million but beat the consensus mark of $76 million. Earlier disclosed contract changes with Tenet Healthcare’s hospitals hurt the metric.

Financial Position (as of Mar 31, 2023)

Tenet Healthcare exited the first quarter with cash and cash equivalents of $766 million, which decreased 10.7% from the 2022-end figure. Total assets of $27,067 million dipped 0.3% from the figure at 2022 end.

Long-term debt, net of the current portion, inched up marginally from the figure as of Dec 31, 2022, to $14,935 million. Short-term debt amounted to $148 million.

THC had no outstanding borrowings under its $1.5 billion line of credit at the end of March-quarter.

Total shareholders’ equity of $1,233 million rose 8% from the 2022-end level.  

In the reported quarter, Tenet Healthcare generated operating cash flows of $449 million, which nearly doubled year over year. Free cash flows were recorded at $214 million, which increased nearly three-fold year over year.

Share Repurchase Update

THC bought back common shares worth $50 million in the first quarter. It has a leftover buyback capacity of $700 million that is set to expire by 2024-end.

2Q23 Guidance

Net operating revenues are anticipated to lie within $4,800-$5,000 million.

Adjusted EBITDA is estimated to lie between $765 million and $815 million.

Adjusted net income from continuing operations is forecasted within $115-$140 million.

Adjusted EPS is projected within $1.07-$1.30.

2023 Guidance Revised

Concurrent with the first-quarter results, THC updated its 2023 guidance with respect to certain metrics.

Net operating revenues are currently anticipated to lie between $19,800 million and $20,200 million in 2023, up from the previous outlook of $19,700-$20,100 million. The midpoint of the revised guidance indicates an improvement of 4.3% from the 2022 reported figure.

Net operating revenues of the Hospital Operations and Other segment are predicted to lie between $15,365 million and $15,615 million, while the same at the Ambulatory Care unit is expected within $3,600-$3,700 million. The Conifer segment’s net operating revenues are estimated within $1,285-$1,335 million.

Adjusted EBITDA is forecasted within $3,210-$3,410 million, higher than the prior view of $3,160-$3,360 million. The midpoint of the updated guidance suggests a 4.6% fall from the 2022 figure. Adjusted EBITDA margin is now expected in the 16.2-16.9% band, up from the prior range of 16-16.7%.

Adjusted net income from continuing operations is presently estimated to lie between $530 million and $655 million this year, higher than the earlier view of $505-$630 million. The midpoint of the revised outlook indicates a decline of 20.4% from the 2022 reported figure.

Adjusted EPS is anticipated within $4.92-$6.09, up from the prior outlook of $4.68-$5.85. The midpoint of the revised guidance hints at a 19% plunge from the 2022 figure.

Net cash provided by operating activities is currently forecasted to lie between $1,725 million and $2,025 million, higher than the earlier guidance of $1,700-$2,000 million.

Free cash flow is now expected within $1,100 million-$1,350 million in 2023, up from the previous outlook of $1,075-$1,325 million. Capital expenditures continue to be projected between $625 million and $675 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

The consensus estimate has shifted 12.8% due to these changes.

VGM Scores

Currently, Tenet has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Tenet has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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