We came across a bullish thesis on Tenet Healthcare Corporation (THC) on Substack by BlackSwanInvestor. In this article, we will summarize the bulls’ thesis on THC. Tenet Healthcare Corporation (THC)’s share was trading at $125.70 as of Dec 19th. THC’s trailing and forward P/E were 3.98 and 10.57 respectively according to Yahoo Finance.
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Tenet Healthcare Corporation is a prominent player in the U.S. healthcare sector, operating across three primary segments: Hospital Operations, Conifer Services, and Ambulatory Care. As of the end of Q3 2024, its Hospital Operations include 49 acute care and specialty hospitals and 142 outpatient facilities, such as imaging centers and urgent care clinics. In addition to this, Conifer Health Services provides revenue cycle management and value-based care services, which are key to the company’s overall healthcare offerings. These two segments have been integrated into their reporting since late 2023, reflecting a more streamlined approach to their operations.
A standout area for Tenet is its Ambulatory Care segment, which comprises the USPI subsidiary. This subsidiary holds indirect ownership interests in 520 ambulatory surgery centers and 24 surgical hospitals. With 161 of these facilities being noncontrolling interests, this segment has been a focal point for growth due to its capital efficiency and higher margins compared to hospital operations. In fact, in the most recent quarter, Ambulatory Care generated 38.5% of net operating revenue in adjusted EBITDA, almost three times the margin of the Hospital Operations segment, which only delivered 13.5%. The segment’s capital expenditures are also about 50% lower than those of Hospital Operations, emphasizing its more efficient financial model. Management’s efforts to expand this segment, which grew by 17.5% in revenue year-over-year, signal a promising future direction for the company.
Financially, Tenet Healthcare has made significant strides, improving its cash flow and using these gains to reduce long-term debt. The company has been divesting less profitable hospital units, leading to a more efficient business structure and a healthier balance sheet. This reduction in debt is an important factor, as it enhances the company’s ability to withstand potential financial stressors in the healthcare sector. As of Q3 2024, Tenet’s debt has decreased from $16.2 billion at the end of 2023 to $12.9 billion, while EBITDA has grown from $3.66 billion in FY2023 to $4.03 billion in the trailing twelve months (TTM). Furthermore, Tenet’s cash reserves have significantly increased from $1.23 billion to $4.09 billion during the same period, improving the company’s liquidity and financial flexibility.
Valuation-wise, Tenet Healthcare’s stock is trading at a significant discount compared to its intrinsic value. With an estimated free cash flow (FCF) of $2.28 billion for the next year and assuming conservative growth, the stock’s fair value is projected at $340.95, substantially higher than its current market price of $133.77. Using an earnings per share (EPS) method, the intrinsic value is even higher, suggesting the stock is undervalued by a wide margin.
Despite potential short-term challenges in the healthcare industry, such as policy and reimbursement uncertainties, Tenet’s operational efficiency and focus on growing its higher-margin Ambulatory Care segment offer a strong foundation for long-term value creation.
Tenet Healthcare Corporation (THC) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 66 hedge fund portfolios held THC at the end of the third quarter which was 64 in the previous quarter. While we acknowledge the risk and potential of THC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than THC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.