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Tenet Raised to Outperform

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We are upgrading our recommendation on Tenet Healthcare Corporation (THC - Free Report) to Outperform based on its consistent revenue growth and improved earnings guidance.

Tenet is scheduled to release its second-quarter 2012 financial results before the market opens on August 7. The Zacks Consensus Estimate for earnings for the quarter currently stands at 5 cents per share, down about 45% from the year-ago quarter.

Tenet has been generating consistent growth in operating revenues since 2006. The first quarter of 2012 also witnessed operating revenue growth of 2.2% year over year to $2.35 billion. The improved results were attributable to significant contributions from Tenet’s general hospitals, which have accounted for more than 96% of the net operating revenues for all periods.

Further, Tenet has been steadily expanding its operating capacity via acquisitions and alliances. It’s subsidiary Conifer’s alliance with Catholic Health Initiatives in May 2012 to provide revenue cycle services is expected to boost revenues, as Catholic Health generates over $6 billion annually in patient revenues. The recent renewal of the service contract with Cigna Corp. (CI - Free Report) is also encouraging, as it is one of the largest contracts owned by the company.

However, Tenet has been experiencing high levels of operating expenses in the past few years due to the impact of various industry-wide and company-specific challenges. Operating expenses increased in the first quarter of 2012 as well, to $2.15 billion from $2.04 billion in the year-ago quarter.

Moreover, Tenet has been experiencing a tough time since the onset of 2012 as far as legal cases are concerned. The $42.75 million civil settlement in April 2012 regarding the over-billing of Medicare, is expected to substantially reduce Tenet’s cash balance, although the company had created a reserve for the same during 2011. Moreover, the dismissal of the lawsuit that Tenet filed against Community Health in April is expected to weigh on the company’s expenses.

Currently, Tenet carries a short-term Zacks #2 Rank (Buy).

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