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On Nov 19, 2013, we upgraded Tenet Healthcare Corp. (THC - Analyst Report) to Neutral based on its growth in outpatient business, strong inorganic growth profile and an overall improvement in revenues. Tenet Healthcare currently carries a Zacks Rank #3 (Hold).  

Why the Upgrade?

Tenet Healthcare’s third quarter 2013 operating earnings of 45 cents, while a penny short of the Zacks Consensus Estimate, improved 36% from the year-ago period. Revenues, which were in line with the Zacks Consensus Estimate, increased 8.4% from the year-ago period to $2.41 million..

Meanwhile, Tenet Healthcare’s growth looks promising. The California Provider Fee Program that was extended till 2016 contributed significantly to third-quarter revenues and this quarterly contribution is expected to double next year. Moreover, the alliance with predictive analytics service provider — VisiQuate Inc. in Nov 2013 is expected to enhance the company’s revenue cycle management and expand its clientele. Again, the acquisition of Vanguard Health Systems (VHS) in Oct 2013 complements the company’s strategy of operating and competitive leverage expansion in the metropolitan markets of San Antonio and other areas in South Texas.

Moreover, strategic acquisitions are aiding improvement in outpatient revenues. The outpatient business has generated higher margins, more than any other business lines for the company. Tenet Healthcare also boasts of a strong capital management structure and low debt burden that should enhance earnings going forward.

However, amid the positives, rising levels of bad debt and the overhang of lawsuits remain matters of concern. Soft inpatient volumes are also expected to persist going forward and mar revenue growth partially.

Other Stocks to Consider

Some better-ranked healthcare service providers include VCA Antech Inc. (WOOF - Snapshot Report), IPC The Hospitalist Company Inc. (IPCM - Snapshot Report) and Acadia Healthcare Company Inc. (ACHC - Snapshot Report). All these stocks hold a Zacks Rank #2 (Buy). 

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