Tenet Healthcare – Momentum

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Shares of Tenet Healthcare Corp. (THC) have surged about 73% since January 2012 and hit a 52-week high on January 3, 2013. This Zacks #1 Rank (Strong Buy) healthcare services provider should have further opportunities for price momentum given its long-term expected earnings growth rate of 10.3%, along with its strategic plans for acquisitions, share repurchases, debt repayment and a reverse stock split.

 

Third Quarter

 

On November 7, Tenet Healthcare reported third-quarter operating earnings of 28 cents per share, which fell short of the Zacks Consensus Estimate but soared 300% from last year.

 

Reported net income, including earnings from discontinued operations of $10 million or 9 cents per share, stood at $40 million or 37 cents per share, improving about 7 times from $6 million or 5 cents in the year-ago quarter.

 

Net operating revenues grew 5.8% year over year to $2.2 billion, largely driven by higher outpatient visits and surgeries along with cost containment initiatives.

 

Subsequently, Tenet Healthcare posted adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) that jumped 40.1% year over year to $269 million. Adjusted EBITDA margin was 12.1%, expanding 300 basis points.

 

Earnings Estimates

 

The Zacks Consensus Estimate for 2012 is currently $1.96 per share. Meanwhile, the Zacks Consensus Estimate for 2013 is up 6.6% to $2.90 per share over the last 60 days, supported by upward revisions from 10 of 15 estimates. This implies growth of 47.6% over 2012.

 

Compelling Valuation

 

Tenet Healthcare currently trades at a forward P/E of 11.8x, a 4% premium to the peer group average of 11.37x. Its trailing 12-month P/E of 21.4x is at a 73% premium to the peer group average of 12.4x. On a price-to-book basis, shares currently trade at 2.9x, a 40% premium to the peer group average of 2.1x.

 

Based on the company’s bolstered growth prospective, the premium looks reasonable and well cushioned by its 12-month ROE of 16.9%, which is above the peer group average of 15.8%.

 

Shares have been consistently trading close to its 52-week high and far above its 200-day moving average since November 2012, while it has fared well with respect to the 50-day moving average since around mid-December 2012.

 

The stock has also outperformed the 1-year S&P 500 index substantially, with a return of 67.06% over the last year, compared with S&P 500’s tally of 16.03%. Volume averages 2.41 million daily.

 

Tenet Healthcare is one of the largest investor-owned health care delivery systems that offer healthcare services through its own 49 acute care hospitals along with ambulatory surgery centers, diagnostic imaging centers and related health care facilities in the U.S. Its hospitals have a total of 13,216 licensed beds and serve the urban and suburban communities across 11 states. With a market capitalization of about $3.65 billion, Tenet competes with HCA Holdings Inc. (HCA) and Community Health Systems Inc. (CYH), among others.

 

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