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Analyst Blog

Tenet Healthcare Corp. (THC - Analyst Report) reported second-quarter 2014 operating earnings of 17 cents per share that surpassed the Zacks Consensus Estimate of 0 cents. However, the results compared unfavorably with the year-ago quarter earnings of 66 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 in the reported quarter was 27 cents per share, narrower than a loss of 49 cents in the year-ago quarter.

Operational Update

Net operating revenue for Tenet Healthcare came in at $4.04 billion, up 66.9% from the prior-year quarter. The improvement was largely attributable to an increase in patient volume, improvement in terms of the commercial managed care contracts and better performance in the Conifer services business. However, a decline in health plan revenues and no revenue recognition from the California Provider Fee program in the second quarter of 2014 were setbacks. Revenues exceeded the Zacks Consensus Estimate of $3.93 billion and the company’s guided range of $3.8–$4 billion.

Tenet Healthcare’s net patient revenue per adjusted admission decreased 6.8% year over year to $11,380.

Total admissions increased 61.2% while adjusted admissions rose 72.7%, both on a year-over-year basis. On the other hand, the area of strategic focus through surgeries increased 59.8% while emergency department visits grew 75.6%.

Bad debt expense decreased 18.2% from the prior-year quarter to $320 million due to a decline in uninsured revenues. As a percentage of revenues, bad debt expense decreased 170 basis points year over year to 7.3%.

Tenet Healthcare’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) improved 36.9% year over year to $460 million in the second quarter, which exceeded the guided range of $375–$425 million.

Financial Position

As of Jun 30, 2014, Tenet Healthcare had cash and cash equivalents of $406 million, up from $113 million as of Dec 31, 2013.  The company exited the quarter with total assets amounting to $16.9 billion, up from $16.1 billion as on Dec 31, 2013.  Shareholder equity at the reported quarter-end was $723 million, down from $755 million as of Dec 31, 2013.

Net cash inflow from operating activities in the second quarter of 2014 was $266 million, higher than $160 million in the year-ago period.

Tenet Healthcare’s capital expenditure increased to $242 million in the second quarter of 2014 from $123 million in the year-ago quarter.

Guidance

Third-Quarter 2014

For the third quarter of 2014, Tenet Healthcare expects adjusted EBITDA in the range of $400–$450 million. The earnings per share guidance for the third quarter is projected at (30) cents–21 cents per share.  This outlook takes into consideration a $5 million incentive payment associated with the electronic health records.

Net operating revenues for the third quarter are expected in the range of $3.8–$4 billion.

Full-Year 2014

The board of directors of Tenet Healthcare raised the 2014 adjusted EBITDA outlook to $1.85–$1.95 billion from $1.8–1.9 billion guided earlier. The earnings per share guidance for 2014 was raised to 65 cents–$1.83 per share, from 49 cents–$1.67 per share, guided earlier.

Net operating revenue guidance was raised to $16–$16.25 billion from $15.7–$16 billion.   

Tenet Healthcare reiterated its adjusted net cash flow guidance for 2014. 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 second-quarter operating earnings declined year over year it successfully surpassed our expectations. Operating revenues also witnessed a significant upside. In terms of admissions, Tenet Healthcare’s second-quarter patient volumes, inpatient admissions, outpatient and emergency department visits and surgeries improved by impressive percentages.

Moreover, synergies from the Vanguard acquisition is expected to help increase Tenet Healthcare’s EBITDA. Additionally, a decrease in bad debt expense makes us optimistic about the stock’s upcoming quarters.

Other Stocks in the Healthcare Space

Humana Inc. (HUM - Analyst Report) posted second-quarter 2014 operating earnings of $2.19 per share, which was in line with the Zacks Consensus Estimate.

WellPoint Inc. (WLP - Analyst Report) reported second-quarter 2014 adjusted income of $2.44 per share, beating the Zacks Consensus Estimate of $2.28.

Molina Healthcare Inc.’s (MOH - Analyst Report) second-quarter 2014 operating earnings of 62 cents per share cruised ahead of the Zacks Consensus Estimate of 43 cents per share.

Zacks Rank

Currently, Tenet Healthcare sports a Zacks Rank #1 (Strong Buy).

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