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Tenet Healthcare Corp. (THC - Analyst Report) reported first-quarter 2014 operating loss of 12 cents that was narrower than the Zacks Consensus Estimate loss of 15 cents per share. However, this compared unfavorably with the year-ago quarter earnings of 33 cents per share.

Higher operating expenses mainly led to the year-over-year decline. Including post tax impairments, restructuring charges, acquisition-related expenses, litigation and investigation expenses as well as loss on extinguishment of debt, net loss for Tenet Healthcare during the reported quarter was 33 cents per share, narrower than a loss of 85 cents in the year-ago quarter.

Operational Update

Net operating revenue for Tenet Healthcare came in at $3.93 billion, up 64.5% from the prior-year quarter. However, revenues missed the Zacks Consensus Estimate of $3.96 billion. The year-over-year revenue growth was largely attributable to improved terms of the commercial managed care contracts and better performance in the outpatient and Conifer services business. However, a decline in health plan revenues owing to a contract with the state of Arizona Medicaid program and no revenue recognition from the California Provider Fee program in the first quarter of 2014 were setbacks.

Tenet Healthcare’s net patient revenue per adjusted admission decreased 1.6% year over year to $11,692.

Total admissions increased 54.3% while adjusted admissions rose 63.8%, both on a year-over-year basis. On the other hand, the area of strategic focus through surgeries increased 60% while emergency department visits grew 63.3%.

Bad debt expense increased 5.8% from the prior-year quarter to $380 million due to a temporary rise in the aging of receivables that stemmed from timing issues with some payers and higher uninsured revenues. As a percentage of revenues, bad debt expense increased 30 basis points year over year to 8.8%.

Tenet Healthcare’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) improved 41.2% year over year to $387 million in the first quarter, which was within the guided range of $350–$400 million.

Financial Position

As of March 31, 2014, Tenet Healthcare had cash and cash equivalents of $141 million, up from $113 million as of Dec 31, 2013.  Tenet Healthcare exited the quarter with total assets amounting to $16.5 billion, up from $16.1 billion as on Dec 31, 2013. Shareholders' equity at quarter end was $728 million, down from $755 million as of Dec 31, 2013.

Net cash outflow from operating activities in the first quarter of 2014 was $19 million, lower than $32 million in the year-ago quarter.

Tenet Healthcare’s capital expenditure increased to $281 million in the first quarter of 2014 from $133 million in the year-ago quarter.

Guidance

Second-Quarter 2014

For the second quarter of 2014, Tenet Healthcare expects adjusted EBITDA to be in the range of $375–425 million. Earnings per share guidance for the second quarter is projected at (39) cents–12 cents per share. This outlook takes into consideration a $50 million incentive payment associated with the electronic health records.

Net operating revenue for the second quarter of 2014 is expected in the band of $3.8–$4 billion.

Full-Year 2014

Taking into account the integration of the Vanguard acquisition, management affirmed the 2014 Adjusted EBITDA outlook of $1.8–1.9 billion.

Net operating revenue for full-year 2014 is expected in the range of $15.7–$16 billion.

The earnings per share outlook was also reiterated at 49 cents–$1.67.

Adjusted net cash flow from operations is expected to range from $1.05 billion to $1.1 billion. This is higher than the 2013 operating cash flow of $589 million.

Our Take

Although Tenet Healthcare’s first-quarter operating loss was narrower than projected, it compared unfavorably with the year-ago quarter earnings mainly due to higher expenses. Synergies from the Vanguard acquisition is expected to help Tenet Healthcare achieve its desired EBITDA goal in 2014. However, decline in same-hospital admissions and a rise in bad debt expense make us skeptical about the performance of the stock.

Others in the Healthcare Space

Molina Healthcare Inc.
(MOH - Analyst Report) reported first-quarter 2014 operating earnings of 10 cents per share, beating the Zacks Consensus Estimate of a break-even.

WellPoint Inc. (WLP - Analyst Report) reported first-quarter 2014 adjusted income of $2.30 per share, beating the Zacks Consensus Estimate of $2.12 per share.

DaVita HealthCare Partners Inc. (DVA - Analyst Report) posted first-quarter 2014 adjusted operating earnings of 85 cents per share that missed the Zacks Consensus Estimate of 87 cents per share.

Zacks Rank

Currently, Tenet Healthcare carries a Zacks Rank #4 (Sell).

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