Investing In Tenet Healthcare 2022 Bond Yielding 5.3%

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About: Tenet Healthcare Corporation (THC)
by: Big Alpha Research
Summary

5.3% yield on a bond maturing in April 2022.

Net of interest expense, THC generates $1 billion in cash from operations and is able to deploy funds to pay down its debt.

Guidance for 2019 shows improved business performance and cash generation ability, indicating stability for bond holders.

I became interested in Tenet Healthcare (THC) for my growth portfolio for retirement savings because I had a view that with an increasingly aging population, healthcare infrastructure companies would be able to benefit over the long term. However, it seemed as I was looking into this stock in my January Fire Portfolio report, that the debt load was high and bulk of the company's earnings were used to service interest on its debt. However, it became apparent to me that if the company could regularly use its cash flows to service the debt, there could be value in investing through its many debt offerings available to retail investors.

Tenet Healthcare (THC) had 115,500 employees and operated 68 hospitals with approximately 17,935 licensed beds, 23 surgical hospitals, and 475 outpatient centers at the end of 2018 and is one of the largest healthcare providers in the US and the largest in outpatient surgery centers.

Here is a summary of the key financials of Tenet Healthcare:

Tenet Healthcare Q4 2018 P&L

Source: Company's 2018 fourth quarter report

While net operating revenues declined 4.5% to $18.3 billion, operating expenses were reduced significantly, resulting in an operating income of $1.6 billion in 2018 (a 5.8% increase from 2017 operating income). Bulk of this operating income is used to pay interest on debt. In 2018, about $1 billion was used to pay interest on Tenet Healthcare's debt which did not reduce significantly from 2017.

The net income of $111 million translates to $1.07 in diluted earnings per share (27x historical PE multiple). As a potential debt holder, it is important to view how much cash can be generated from the operations and how strong the balance sheet of the company is.

Tenet Healthcare has $14.6 billion of long term debt and another $182 million due within 12 months. In comparison, tangible assets amounts to $13.4 billion.

At the same time, cash flow generated from operations amounted to $1 billion in 2018. It is important to note that this $1 billion in cash generated from operations had already included the interest expense of $976 million paid. We can also clearly see that the company is diverting all of its cash towards reducing its borrowings or in stock purchases.

In summary, past 2017 and 2018 records show there is a willingness to pay down some of the company's debt, but a majority of the funds was taken to buy shares of its subsidiary USPI. This was most evident in 2017 where the company actually issued close to $3.8 billion in loans while repaying $4.1 billion in the same period. Cash generated from operations was $1.2 billion, so definitely more could have been done to cut down the debt load if management did not think it was manageable.

The company's effective interest rate was approximately 6.7%. The THC 8.125% bond maturing in April 2022 currently yields 5.306% and its short dated bond maturing in October 2020 yields 3.516%.

Management's guidance for 2019 should give debt investors confidence in the company's ability to repay its debt. Cash flow generated from operations has been estimated at $1.1 to $1.4 billion and diluted earnings per share based on management's guidance is between $2.08 and $2.59 (a range of 11x to 14x forward PE).

With this guidance in mind, and in noting the stability of the healthcare industry in terms of being able to generate operating cash flow, I have just placed a queue to buy THC's 2022 bond at 5.3% yield.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in THC over 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.