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Can Tenet Healthcare (THC) Get Back on Growth Path in 2018?

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For Tenet Healthcare Corp. (THC - Free Report) , a leading health care services company in the United States, 2017 was not a good year.  Having suffered from falling revenues, weak volumes, high bad debts and overall industry weakness, the company’s performance was weak.

The stock has lost 14% in a year’s time, underperforming the industry’s decline of 0.7%.

The company’s performance pales all the more compared to other hospital stocks like HCA Holdings, Inc (HCA - Free Report) and Universal Health Services, Inc. (UHS - Free Report) that have gained 9.7% and 2.1%, respectively, over the same period

What Affected 2017?

The company incurred losses in the last two quarters owing to lower revenues and higher expenses. The last quarter, however, suffered from the adverse impact of hurricanes Harvey and Irma.

Tenet Healthcare’s revenues have been continuously declining over last two quarters due to reduced admissions, inpatient and outpatient surgeries, emergency department visits and total outpatient visits. At the end of the first nine months of 2017, revenues declined nearly 4% year over year.

The downtrend in revenues was due to the high deductible plans that result in more out-of-pocket expenses of the patients. Increase in uninsured rates due to the uncertainty surrounding the Affordable Care Act also caused a reduction in volume of patients. 

This apart, the company also suffered from lower payer rates and increased bad debt. Lower net revenues combined with increased operating expenses adversely impacted its margin.

Tenet Healthcare has been facing a continuous increase in its debt level over the past many years. The company uses a large portion of its cash flow to pay the interests on its debts, which in turn, lead to limited funds available for its operations, growth initiatives or capital expenditures. The cash flow started declining since 2016 and the company lowered its expectation for 2017. 

Tepid Guidance for 2017 and 2018

Following disappointing results in the last two quarters, the company lowered its guidance for the second time in 2017 at the end of the third quarter.  Tenet Healthcare projects revenues in the range of $18.9 billion to $19.1 billion for 2017, down 3% from the previously guided range of $19.1 billion to $19.4 billion. Adjusted earnings per diluted share for 2017 are projected in the range of 59 cents to 74 cents, down 26% from the earlier projection of 69-99 cents.

Tenet Healthcare expects the recently enacted “Tax Cut and Jobs Act” law to affect its 2018 earnings as well. The company now anticipates adjusted diluted earnings per share to range between 58 cents and 97 cents compared with the previously guided range of $1.07-$1.36. For 2018, it expects net operating revenues to range within $17.8 billion to $18.2 billion. This also compares unfavorably with $18.9-$19.1 billion guided for 2017.

Does 2018 Look Promising?

Tenet Healthcare recently announced that it will be undertaking three additional initiatives as an extension to its goal to improve the overall financial performance and enhance shareholders’ value. These initiatives include strengthening of its previously announced cost reduction plan, updating the ongoing process of its board refreshment and finding a buyer for its Conifer segment.

The company’s cost reduction initiatives are expected to help it lower annual operating expenses by $250 million, with annualized run-rate savings to be achieved by 2018 end.

The company’s accretive acquisitions and strategic divestitures are also expected to fine tune its operations in 2018, but the immediate impact of it on earnings is hard to predict.

Despite these growth initiatives undertaken by the company, its shares are likely to remain under pressure until the actual earnings number reveal some positive developments.

Downward Estimate Revision

The company has also seen downward estimate revision over the past 60 days. The Zacks Consensus Estimate for 2018 has been revised downward by 14.3% over the same time frame, reflecting bearish analyst sentiment.

Zacks Rank and A Stock to Consider

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

A better-ranked stock in the medical sector is Centene Corp (CNC - Free Report) . The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

Centene delivered positive surprises in each of the last four quarters with an average beat of 10.6%.

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