Tenet Healthcare: Another Beat-And-Raise Quarter Underpins The Positive Outlook
Summary
- Tenet Healthcare posted another solid quarter on continued increases across both hospital volumes and pricing.
- With key hospital segment metrics on the recovery path to pre-COVID-19 levels, Tenet has a solid foundation from which to deliver future growth.
- The lower leverage levels also allow for optionality on the capital allocation front.
- At the current relative valuation discount, shares are compelling.
Tenet Healthcare (NYSE:THC), a diversified healthcare services operator of general acute care hospitals, short-stay surgical hospitals, and outpatient centers in the US and UK, recently reported a solid set of FQ2 '21 results, reflecting continued outperformance on both hospital volumes and pricing. Alongside the quarterly strength, THC also effectively raised guidance in line with its successful execution of growth and operational improvements through the back half of the year. With commentary from peers across the healthcare value chain also indicating a favorable healthcare backdrop, THC's exposure to the higher-growth ambulatory business leaves it well-positioned to outperform. Shares remain compelling at the current c. 7x EV/EBITDA valuation - a considerable discount to peers HCA Healthcare (HCA) and Community Health Systems (CYH).
Near-Term Outlook Brightens Following Another Positive Quarter
THC recently reported FQ2 '21 EBITDA (ex-grant income) of c. $810 million, well above consensus estimates on a continued healthcare recovery, with sequential improvement across all key metrics towards the pre-COVID-19 baseline. Developments on the cost side also appear promising, with growing evidence of an improved cost structure boosting margins even as mix benefits normalize. Overall, the quarter highlighted the solid execution by management post-pandemic, with the increased ambulatory contribution also positioning the company well for continued growth ahead.
Source: Tenet Healthcare FQ2 '21 Earnings Presentation Slides
While headline revenue guidance has been lowered due to divestiture headwinds, the underlying second-half outlook for revenue appears to be improving. For context, management updated fiscal 2021 guidance as follows - adj EBITDA of $3.15-$3.25 billion (up from the previous $3.0-$3.2 billion range), revenue of $19.25-$19.65 billion (up from the previous $19.4-$19.8 billion range), and adj EPS of $6.25-$7.17 (up from the previous $4.12-$5.46 range). Note that these guidance numbers include the impact of the THC's hospital assets, which had generated c. $933 million of revenue and $122 million of EBITDA on a trailing twelve-month basis. Per THC, excluding the revenue and EBITDA contribution of these hospitals would still have yielded a very strong c. $418 million and $55 million, respectively.
Source: Tenet Healthcare FQ2 '21 Earnings Presentation Slides
Continued Hospital Segment Improvement is a Positive Signal
Notably, the hospital segment has been a key driver, with same-facility revenue growth up c. 33% Y/Y (+23.9% volume; +7.4% pricing/mix). Even if we were to exclude the c. $4 million of CARES Act grant income, revenue would still have been up an impressive c. 33% Y/Y (albeit off a depressed base due to COVID-19 in the prior year). Adj EBITDA (ex-grant income) was similarly strong at c. $445 million, reflecting the ongoing recovery in volumes, high patient acuity, and stable payor mix in the quarter. While labor supply pressure has worsened amid the pandemic, THC's approach of balancing core staff with additional contract labor appears to be working well, along with its current incentive structure for overtime in its hospitals.
Source: Tenet Healthcare FQ2 '21 Earnings Presentation Slides
As a result, THC has delivered safe productivity management and opportunities to reduce length of stay, both of which have underpinned sustained profit growth within the segment. And while the ambulatory segment is the growth driver, I think management's ability to execute and show stability in the acute hospital segment will be critical to building a solid foundation from which THC can deliver future growth. In particular, the planned service line expansion and asset sales should unlock incremental bottom-line growth, and I see continued execution here as key to driving performance in the shares.
Strong Balance Sheet Creates Capital Deployment Optionality
Funding-wise, THC appears well-positioned, having ended the quarter with c. $2.2 billion in cash on the balance sheet and an even lower net leverage after the company paid off c. $164 million (of a total c. $1.5 billion) in Medicare Advanced payments. And with THC also generating c. $75 million in net proceeds from the sale of its urgent care centers and c. $35 million from the sale/leaseback of a medical office building and other property, THC's leverage level is now much improved at c. 4.2x (inclusive of Medicare advances liabilities).
Source: Tenet Healthcare FQ2 '21 Earnings Presentation Slides
THC's liquidity profile is also its strongest in years, providing management with significantly more optionality on capital allocation without impacting its growth investment plans. As debt paydown is slated to be the primary use of capital (note THC has callable debt that can be redeemed at attractive prices), I see THC's leverage finishing the year closer toward c. 4x. However, the lower leverage also allows management to increasingly focus on M&A, especially in the ambulatory segment, to achieve its goal of a 50% EBITDA mix by fiscal 2023. And while management is committed to spinning off Conifer, the strong balance sheet also allows it to keep all its options open, so I would not rule out an outright sale or even THC keeping the operations in-house.
Final Take
On balance, THC's solid FQ2 '21 results and guidance, along with commentary from its peers across the healthcare value chain, point toward healthcare demand continuing to increase across most modalities. Considering its favorable mix, THC should outperform, and as such, I believe THC's operating fundamentals are very attractive. Along with a healthier balance sheet post-deleveraging, THC is equipped with plenty of capacity for continued M&A without impacting its debt paydown plans going forward. Shares currently trade at a compelling c. 7x EV/EBITDA, which represents a discount to peers HCA & CYH.
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