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Why Tenet Healthcare Dived 13% on Monday

By Eric Volkman – Sep 21, 2020 at 7:17PM

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A nearly 30% price target cut from a noted investment bank was the culprit.

What happened

Tenet Healthcare (THC -1.80%) really took it on the chin Monday. An analyst's fairly deep price cut sent the stock downward; at the end of the trading day it was down by over 13%.

So what

Analyst Gary Taylor of J.P. Morgan eviscerated his price target on the healthcare facilities operator's stock, chopping it down to $20 from the former $28. Interestingly, at the same time he lifted his recommendation from underweight to neutral.

The prognosticator wrote that Tenet has made a number of smart acquisitions and divestments that have resulted in a "material strategic transformation."

Two nurses working with patient equipment

Image source: Getty Images.

Taylor feels that "these moves will serve to improve THC's consolidated margins and partially insulate THC to some degree from the rate and utilization pressures that other hospitals may face as the U.S. delivery system moves away from a fee-for-service payment model over the coming years."

On the downside, this realignment could result in free cash flow (FCF) returns coming in below average. Taylor also believes that the boost to the healthcare facilities segment from the passage and implementation of the Affordable Care Act (ACA, i.e., Obamacare) is largely over.

Now what

Investors are also nervous about the future of the ACA, in the wake of Supreme Court Justice Ruth Bader Ginsburg's death. Many fear that if a conservative judge is appointed to the bench, the chances for some form of repeal will increase dramatically. If this happens, stocks like Tenet could take a severe hit.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Tenet Healthcare Stock Quote
Tenet Healthcare
$45.35 (-1.80%) $0.83

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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