Is This Hospital Stock Undervalued?

Tenet Healthcare shares took a beating recently after missing analyst expectations. But the selling may have been overdone. Compared to peers like HCA Holdings and LifePoint Hospitals, Tenet may be a compelling investment consideration. Here are two reasons to check into this hospital stock.

Mar 3, 2014 at 6:30PM

Tenet Healthcare Corp. (NYSE:THC) shares took a tumble recently, plunging more than 8% in one day after guidance missed analyst estimates. But are things at the hospital operator as bad as the share price collapse suggests? There is evidence that the stock sell-off may have been overdone. Compared to peers like HCA Holdings (NYSE:HCA) and LifePoint Hospitals (NASDAQ:LPNT), Tenet looks an attractive investment consideration. Here are a couple of reasons why investors might want to look in to this hospital stock.

1. Shares appear bargain-priced
Tenet Healthcare's stock dive doesn't seem related to recent performance. The company's latest quarter looked fairly good. Revenue ballooned over 66% year-over-year, thanks to a recent acquisition. On a comparable same-hospital to same-hospital basis, revenue increased about 1%, helped by same-hospital surgeries growing a striking 21.5%.

Though current results were reasonably good, Wall Street seemed less taken with Tenet's 2014 guidance. The company expects adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, of between $1.8 billion to $1.9 billion, just shy of analyst expectations for $1.94 billion.

Tenet's anticipated EBITDA, a standard financial metric for the hospital industry, doesn't appear seriously deficient, however. It's an over 30% increase from that delivered in 2013 and also suggests the company's shares might be undervalued. Trading at around 2.4 times the low end of forecast, Tenet's market value looks heavily discounted to peer hospital owners like HCA Holdings.

HCA, one of the nation's leading health care services companies, also reported a fine recent quarter. Revenue increased 4.8% year-over-year and adjusted EBITDA grew 6.7%. Growth was primarily driven by a revenue per admission increase of 4.6% compared to a year earlier.

The company anticipates continued gains in 2014 with total revenues in the $35.5 billion to $36.5 billion range for a year-over-year increase of between 3.8% and 6.7%. EBITDA is expected to be flat to up 4.7% or between $6.6 billion and $6.9 billion.

A premier participant in the hospitals sector, HCA is currently priced around 3.3 times the high end of EBITDA guidance. While HCA probably deserves a premium valuation, its multiple spread to Tenet's appears to me to be excessively wide.

2. Long-term prospects look pretty good
Longer-term prospects suggest a higher multiple for Tenet Healthcare might be reasonable. Its $4.3 billion acquisition of Vanguard Health Systems in late 2013 should reap meaningful future benefits. Vanguard generated about $6 billion in annual revenue during fiscal 2013, so the acquisition should add that additional revenue to Tenet's numbers for 2014. Management expects to generate at least $100 million to $200 million in synergistic cost savings, so a good portion of Tenet's gains will likely be recognized in the latter part of 2014 and into 2015.

The company's Conifer Health Solutions subsidiary, an administrative services provider to the health care industry, should also provide a boost. Benefiting from the increased financial stress and complexity of running a medical facility, Conifer's nearly 75% year-over-year revenue jump in the latest quarter is a sign that demand for its services is growing rapidly.

Tenet could also expand through further acquisitions. Hospital system consolidation is a powerful trend. Besides Tenet's purchase of Vanguard, major industry participant Community Health Systems (NYSE:CYH) recently closed on its $7.6 billion buyout of competitor Health Management Associates.

Though Tenet needs to concentrate on paying down debt in the short run, I suspect that management will consider other mergers eventually. A potential target may be LifePoint Hospitals, one of the few remaining large publicly traded hospital chains. LifePoint reported its own impressive quarter recently. Revenue rose 6.6% from a year ago and adjusted EBITDA increased 10.1%.

The gains were helped by LifePoint's own network expansion strategy of acquiring smaller hospitals. The company expects another good year in 2014 with EBITDA gaining 4% to 10%. Currently trading at a robust 4.4 times the high-end of forecast EBITDA, LifePoint's position as a potential acquisition target seems well recognized by Wall Street.

Uncertainty remains a concern
The hospital industry does face issues. Consequences from the Affordable Care Act are still a mystery. While it's believed that the increased number of insured patients will reduce bad debt expenses and gradually drive hospital utilization higher, there is no assurance that the gains will be significant. But the relief is certainly needed. Bad debts are a major hospital problem, costing Tenet almost $1 billion last year, and weak inpatient admission trends are a nagging concern. For the fourth quarter, Tenet's admissions were down 3% and HCA's were down about 1%. These are comparatively good results when compared to LifePoint's decline of 5% and Community Health's 10% drop.

While assistance from the Affordable Care Act is a possibility, reimbursement cuts from Medicare and Medicaid seem inevitable. These government programs are key payers in the health care field, accounting for over 30% of Tenet's patient revenue last year, and if the programs focus on reducing provider rates and fees aggressively, it could be a major industry difficulty.

Summary
Tenet Healthcare disappointed Wall Street recently and paid the price. Its shares dropped over 8% in one day. There is evidence that the selling may have been excessive, however. Priced at an attractive valuation, compared to peers like HCA and LifePoint Hospitals, and possessing a hopeful future, Tenet may be a compelling investment consideration.

Looking for better growth opportunities?
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Bob Chandler owns shares of Tenet Healthcare. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers