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Tenet Healthcare Rides on Inorganic Growth, Reduces Leverage

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Tenet Healthcare Corporation THC is taking initiatives to expand through its inorganic growth policy as well as reduce costs. The company has also been successful in lowering its leverage level over the last few quarters.

Over the years, this leading healthcare services company constantly strengthened its position in the market by tying up with industry biggies like Blue Cross Blue Shield of Texas, Cigna Corporation CI, Aetna, UnitedHealth Group Incorporated UNH, Humana Inc. HUM, et al. Its solid inorganic growth story, aimed at boosting scale of business, operating capacity and expanding its geographical presence, continued in 2019 wherein it acquired 10 outpatient businesses (all of which are owned by United Surgical Partners International) and various physician practices for a deal value of $25 million.

The company focuses on divesting its non-core and unprofitable business units to repay its debt and maintain financial liquidity. A number of divestitures carried out over the past three years have streamlined its operations and generated funds to pay down debt. The company’s strategic priorities include completing hospital divestitures and allocating capital to higher return on investments The company is on course to spin-off of its Conifer business into an independent publicly-traded company, which is expected to close by the end of 2021. The company is likely to decrease its debt burden by using the proceeds from this transaction.

After enduring high level of operating expenses for a number of years, the company took cost-saving measures, consisting of headcount cut and the renegotiation of contracts with suppliers and vendors. Tenet Healthcare expects better expense management to help control its costs.

Its leverage level has also been declining with long-term debt dipping 0.5% year over year in 2019. Given its restructuring plans, we expect the company to lower its debt level further.

The company’s recently-provided 2020 guidance also looks encouraging. It expects adjusted earnings per share from continuing operations between $2.69 and $3.35. Tenet Healthcare expects net operating revenues of $19.1-$19.5 billion, the midpoint indicating a rise of 4% from the 2019 reported figure. Adjusted EBITDA is estimated between $2.8 billion and $2.9 billion, the midpoint suggesting a 5.3% increase from the 2019 reported number on the back of sustained organic volume expansion on its hospital and ambulatory platforms. The company projects adjusted net cash provided by operating activities of $1.5-$1.7 billion, implying a 30% hike from the 2019 reported figure.

Given these positives, this Zacks Rank #3 (Hold) stock has surged 45.4% in the past six months against the industry’s decline of 1.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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