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Tenet Downgraded to Neutral
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ShareRecently, we downgraded Tenet Healthcare Corporation (THC - Analyst Report) to Neutral with a price target of $5. Our price target is based on 23.8x our 2010 earnings estimate of 21 cents.
Although we are pleased with the company’s efforts to improve service quality, the competition in the industry is a concern. Furthermore, bad debt expense in the most recent quarter increased $12 million year-over-year on a same-hospital basis. The increase in bad debts could weaken Tenet. Furthermore, Tenet’s dependence on government programs for revenues has inherent risks.
The company operates in a highly competitive and fragmented health care industry. Tenet competes with players such as Universal Health Services Inc. (UHS - Snapshot Report) and Lifepoint Hospitals Inc. (LPNT - Snapshot Report). Competitors will always look to grab market share by offering lower prices, new services or services that are better than Tenet’s. This is a matter of concern for the company and has the potential to affect the performance of the stock adversely.
Tenet Healthcare serves a large number of both uninsured and underinsured patients with an increased burden of co-payments and deductibles as a result of changes in their healthcare plans. Consequently, the company has a high level of uncollectible accounts.
Furthermore, bad debt expense increased $12 million, or 7.3%, compared to the fourth quarter of 2008, on a same-hospital basis. The increase related to higher pricing coupled with decreased collection rates from self-pay accounts (i.e. patients who neither qualify for government program payments such as Medicare and Medicaid nor possess some form of private insurance, therefore being responsible for their own medical bills). The increase in bad debts is unwelcome news for Tenet.
For fiscal 2009, approximately 25.1% of the company’s same-hospital net patient revenues were derived from the Medicare program, and approximately 8.1% were derived from various state Medicaid programs, excluding Medicare and Medicaid managed care programs. The Medicare and Medicaid programs are subject to statutory and regulatory changes, administrative rulings etc. Changes in these or other government health care programs could have an adverse effect on Tenet’s business.
The risks mentioned above have caused us to downgrade the stock to Neutral. This implies that the stock is expected to perform in line with the overall U.S. equity market over the next 6−12 months. Consequently, we advise investors to retain the stock over the time period.
Read the full analyst report on THC
Read the full analyst report on UHS
Read the full analyst report on LPNT
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