1 week Ago
hxdbzxy At the start of the year, I concluded that Tenet Healthcare ( NYSE: THC ) was shrinking in order to grow the business. The company sold off some of its facilities in order to deleverage, with divestments reducing debt and improving the risk-reward profile, as the business was arriving in calmer waters. The company has seen incredibly strong operating momentum in the first half of the year, while announcing more divestments, all of which results in rapidly lower leverage ratios, but moreover hugely improved earnings power.
Management deserves a big congratulation on delivering on real results here, yet with shares pricing in improvements in a rather aggressive manner, I am not yet willing to jump the bandwagon. Tenet - A Diversified Healthcare Service Firm Founded back in 1969, Tenet is a diversified healthcare service business. A huge billing scandal made that a $200 stock in 2002 fell to just single digits during the economic recession by the end of the decade.
The company is a hospital and ambulatory platform with full ownership or equity stakes in roughly 500 ambulatory surgery centers and hospitals. Some three quarters of sales are generated from the hospital segment, largely complemented by a relatively lucrative ambulatory segment. A recovery, and bolt-on dealmaking strategy to drive consolidation, made that sales doubled to $20 billion over the past decade, as single digit operating margins improved towards 13-14% of sales.
This looks solid, although that M&A induced growth made that net debt has risen substantially with the passage of time. The Current Performance Early in 2023, the company posted a near 2% fall in 2022 sales to $19.2 billion, as an EBITDA number of $3.
5 billion looked solid, yet this is an asset-heavy business which involves a lot of real estate. Operating profits of $2.3 billion translated into operating margins equal to 12% of sales.
These numbers are somewhat complicated as it involved the partial ownership of many properties and businesses, with GAAP earnings of $411 million coming in at $3.84 per share, as earnings to non-controlling interest actually exceeded net earnings to Tenet's investors. With $27 billion in assets and a more than $14 billion net debt load, the business was quite leveraged and thereby susceptible to higher interest rates.
The business was on track to grow sales to over $20 billion in 2023, as a 4 times leverage ratio looked quite reasonable, with adjusted earnings topping $5 per share. Shrinking, And Growing In an attempt to address leverage, the company started to sell some assets in 2023. This included the sale of three hospitals to Novant Health, yielding after-tax proceeds of $1.
75 billion. The divestment made that $552 million in sales would leave the door, as well as $150 million in EBITDA. The strong margin profile yielded relatively compelling sales multiples for these assets.
The company furthermore sold another 4 hospitals to UCI Health, yielding after-tax proceeds of $800 million, with the deal involving another a billion in sales leaving the door. All in all, pro forma net debt would fall to $11.5 billion, as I pegged leverage ratio in the mid-3s.
An $89 stock in February looked quite compelling. The business was shrinking and reducing leverage and with earnings power comfortably surpassing $5 per share, shares traded at fair multiples. This, however, did not automatically look compelling given the volatile track record of the business, the fact that no dividends are paid, as the situation remained hard to read amidst a large minority interest.
The ambiguity made me cautious to get involved just yet, but this stance has been too conservative, as shares have been embarking on a major run so far this year. A Huge Run An $89 stock in February has seen a huge and relentless rally through the year, with shares now trading up 70% to $153 per share, after recently trading at a high of $167 per share. In February, the company reported 2023 sales up nearly 7% to $20.
5 billion, flattish EBITDA at $3.5 billion, with GAAP earnings posted at $5.71 per share (as adjusted earnings were reported a dollar per share higher).
The company guided for 2024 sales at a midpoint of $20.1 billion and EBITDA nearly $3.4 billion.
While both these numbers are down on a reported basis, underlying organic growth was to be found if we consider the divestments being announced. Furthermore, the company continued its divestment activity. In February, the company announced the sale of 2 other hospitals to Adventist Health, with after-tax proceeds seen at $450 million, and some $337 million in sales leaving the door.
Amidst the release of the first quarter results, the company hiked the midpoint of the full-year sales guidance by a hundred million to $20.2 billion, but moreover it increased the EBITDA guidance by more than $200 million to a midpoint of $3.6 billion.
This was very comforting as net debt surpassed the $10 billion mark, with leverage ratios rapidly coming down. In July, the company reported another convincing set of second quarter results. This triggered the company into hiking the full-year sales guidance by six hundred million to $20.
8 billion, despite more asset sales, with adjusted EBITDA now seen at a midpoint of $3.9 billion! Net debt was reported at $10 billion, which made that leverage ratios have come down to about 2.5 times already.
Year to date, adjusted earnings have doubled to $5.53 per share. In the time frame of less than half a year, a business with earnings power around $6 per share and being leveraged 4 times, has been transformed into a business which posts earnings close to $10 per share, with leverage down to 2.
5 times! Further Deleveraging Following the release of sound second quarter results, the company announced another divestment. Early in August, Tenet announced the sale of its 70% ownership interest in Brookwood Baptist Health, in a deal set to yield after-tax proceeds of $790 million. The transaction includes 5 hospitals, with this deal reducing leverage to just over $9 billion here, for a leverage ratio which rapidly moves toward the lower 2s here.
Frankly, there is not a great need to divest assets, or to further deleverage here, but the strategy of shrinking to grow has served the business and investors well so far. On top of the divestment, real momentum in Tenet has come from genuine volume growth, a sound strategy which delivers on organic growth, subdued labor cost inflation and the divestment of underperforming hospitals. With 98 million shares trading at $153 following the impressive momentum run, shares command a $15 billion equity valuation, or $25 billion enterprise valuation here.
This values operations at about 1.2 times sales, a very reasonable 6–7 times EBITDA multiple, as earnings power around $10 per share yields a very acceptable 15 times earnings multiple, very acceptable, certainly as leverage has come down a great deal. The reality is that I can only congratulate Tenet's management for doing an outstanding job, and kick myself for being too conservative at the start of the year.
If the company can continue this operating performance, there seems to be more room for Tenet's shares to keep advancing, but I would like to learn more about the continuation of momentum before reconsidering a neutral but very constructive stance. If you like to see more ideas, please subscribe to the premium service "Value in Corporate Events" here and try the free trial. In this service we cover major earnings events, M&A, IPOs and other significant corporate events with actionable ideas.
Furthermore, we provide coverage of situations and names on request! The Value Investor has a Master of Science with specialization in financial markets and a decade of experience tracking companies via catalytic company events. Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions.
I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results.
No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank.
Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body..
