Tenet Healthcare Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Tenet Healthcare Corporation operates a diverse network of healthcare facilities, including hospitals and outpatient centers, primarily in the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Tenet Healthcare is a for-profit healthcare provider operating hospitals, ambulatory surgery centers, and other related healthcare facilities in the US. They are primarily a service provider, receiving revenue from patient care services, often through agreements with insurance companies and government programs like Medicare and Medicaid.

Revenue Distribution

Tenet operates in two main segments:

  1. Hospital Operations: This segment constitutes the core of Tenet’s business, including acute care hospitals, outpatient centers, and related healthcare facilities, and generates the majority of their revenue.
  2. Ambulatory Care: This segment consists of ambulatory surgery centers (ASCs), imaging centers, urgent care centers, and other outpatient facilities, typically generating revenue from higher margin procedures.
  • Healthcare Consolidation: The healthcare sector is experiencing ongoing consolidation, with hospital systems and physician groups merging to achieve economies of scale, improved bargaining power with insurers, and better care coordination, as well as increased reach.
  • Shift to Outpatient Services: There is a significant shift toward outpatient facilities, as they offer more cost-effective care than inpatient services.
  • Emphasis on Value-Based Care: Medicare and other payers are increasingly shifting away from a traditional fee-for-service model to payment models that are based on quality and efficiency, rather than solely on volume of services.
  • Increasing Complexity of the Industry: The regulatory framework of healthcare and health insurance is highly complex and often difficult to navigate. Regulations and changes on billing and documentation requirements create both challenges and also opportunity, where providers able to navigate the changes will outperform others.
  • Technological Advancements: Technological advancements in medical treatments, processes, and data management are influencing the industry significantly, with telehealth services gaining more prominence in recent years.
  • Labor Challenges: There has been a shortage of healthcare workers lately with increases in salary, benefits, and bonus costs for health companies. The great resignation and unionization have also greatly impacted the health sector and put pressure on expenses.

Competitive Landscape

Tenet faces competition from a diverse group of providers, including:

  • Other for-profit hospital systems: HCA Healthcare, Community Health Systems, and others.
  • Nonprofit hospital systems: Which operate hospitals and outpatient centers throughout the country.
  • Ambulatory care providers: These include stand-alone surgery centers and physician offices who provide certain services, competing with Tenet’s outpatient operations.
  • Health insurance plans: Some health insurers are integrated providers, directly operating clinics and other facilities, providing competition at various levels of the healthcare market.
  • Local providers: Depending on the region, smaller facilities could pose serious competition, and these are usually quite difficult to analyse due to lack of publicly available information.

What Makes Tenet Different?

  • Geographic Diversification: Tenet operates facilities across several states, allowing it to benefit from regional market dynamics.
  • Operational Excellence Initiatives: The company has focused on improving operations, reducing costs, and increasing efficiencies.
  • Strategic Acquisitions and Divestitures: The company has pursued strategic acquisitions in areas that align with its growth goals. At the same time, it has been divesting operations that do not fit into the corporate strategy.
  • Focus on Ambulatory Care Growth: Tenet is making a concerted push into ambulatory care as a source of growth for the company, which has higher profitability than inpatient services.

One important thing to note about Tenet is that they utilize an asset-heavy business model which includes owning a lot of physical facilities, making them somewhat of a hybrid company that is both a service company and a real estate investment trust.

Financial Analysis

Data for the latest quarter, nine months ended September 30, 2023, and the past several years are analyzed below.

Income Statement

The company’s financial performance is analyzed through the following key measures:

  • Net Operating Revenue: For the nine months ended Sept 30, 2023 this was $15.89 Billion compared to $15.30 Billion for the same period last year. A increase of 3.9% YoY.
  • Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). For the nine months ended Sept 30, 2023, this was $3.40 Billion vs. $3.53 Billion for same period last year. A decrease of about 3.7% YoY. The drop in adj. EBITDA is driven by higher labour and supply costs.
  • Net Income Attributable to Tenet Healthcare Corporation common shareholders. For the nine months ended Sept 30, 2023, this came in at $0.38 billion, which is a big decrease compared to the $1.05 billion for the same period last year. This has been largely affected by a one time loss of around $0.4 billion related to changes in debt and interest expense.
  • Earnings per share (EPS). For the nine months ended Sept 30, 2023, diluted EPS was $3.37 compared to $9.36 for the same period last year. The reasons are the same as described above in net income.
  • Revenues from hospitals and related outpatient facilities Revenues from this segment are $14.6 billion for the nine months ended Sept 30, 2023 (which constitute about 91.8% of total revenues). In 2022 full year they were $20.2 billion or 92% of total revenues.
  • Ambulatory Care Revenues: Ambulatory care segment contributes the rest of the revenue with $1.3 billion (8.2%). In 2022 full year it contributed about $1.8 billion.
  • Operating Margins: Their operating margins have typically been low, at around 9-10 percent. This is because it is a labour intensive business, with a big portion of earnings going to costs.

Key financial highlights from Q3 2023 earning calls include:

  • An increase in net operating revenue by 3% YoY
  • Same-hospital admissions increased by 1.4%, with emergency admissions up by 2.6% and inpatient admissions up by 1.0%.
  • Increase in net operating revenues at Ambulatory care segment by 4.4% YoY.
  • A reduction of debt by $3.8 billion over the last two years

Key Takeaway from the Income Statements:

Tenet has been growing in revenue but is dealing with cost headwinds, which have resulted in a lower profitability in the first nine months of the year than compared to last year, as well as a big drop in net profit due to interest rate expense. They have increased utilization of their facilities and are reducing debt. The company is focusing on growing its ambulatory segment. It is important to note that revenues have increased despite sale of some hospitals over the past years, implying increase in revenues in the rest of the hospital segments.

Balance Sheet

Key elements from the latest balance sheet are:

  • Current Assets: The company had about $8.8 billion in current assets with cash and equivalents constituting around $2.7 billion of it. The rest mostly consists of receivables and inventories.
  • Total Assets: Total assets stand at $28.2 billion.
  • Total Liabilities: Total liabilities stand at $21.2 billion.
  • Shareholders Equity: Total shareholders’ equity is around $6.9 billion.
  • Long term debt and Senior Secured Notes: These constitute $12.7 billion which is a large percentage of the total liabilities, and is also a good portion of the total enterprise value.
  • Unfunded Retirement Liabilities: The unfunded pension liabilities of the company stand at around $1.1 billion and are treated as a debt equivalent.

Key Takeaway from the Balance Sheet:

Tenet has a very high amount of liabilities, mainly in debt. The company must consistently balance growth with increasing debt and leverage. A big positive is that management has decreased the amount of debt over the past 2 years by about $3.8 billion, even while making key acquisitions.

It’s important to note that most of Tenet’s debt is at fixed interest, so if interest rates were to increase, their debt service payment would not change much. This helps a lot in case of interest rate changes, although a small portion of the debt is at variable interest rate.

Cash Flows

  • Cash flow from Operations: For the nine months ended Sept 30, 2023, the company had $2.28 Billion in Cash flow from operating activities vs $3.54 billion for the same period last year. This is mainly due to lower overall earnings and an increase in working capital needs.
  • Cash flow from Investing: The net cash outflow for investing activities stands at around $1 billion, due mainly to investments in property, equipment, acquisitions, and joint ventures, partially offset by a few divestitures.
  • Cash flow from financing activities: For the nine months ended Sept 30, 2023 they had a net cash outflow of $1.3 Billion, mainly due to debt repayments.
  • Free Cash Flows: For the nine months ended Sept 30, 2023, their free cash flow was $0.86 billion vs $2.33 Billion. The large difference is mainly due to decrease in cash flow from operations, and an increase in capital expenditure.
  • Share Repurchases: The company is also actively purchasing its own shares. In the last 9 months they had spent $548 Million on share repurchases.

Key Takeaways from Cash Flow Statement:

While the company is generating positive cash flows from its operations, the need to invest aggressively in both its operations and its growth, means that the company’s free cash flow is smaller than it seems. The company is also spending a lot of money on share buybacks.

Moat Assessment

Tenet has a narrow moat due to multiple sources of competitive advantage that include scale, geographic density and switching costs for health providers. However they are not dominant in their respective fields, and have strong competition.

  • Scale: They are quite big in size, but are not the biggest in their respective areas, they will be able to get slightly better deals with suppliers and have a better infrastructure than smaller hospitals.
  • Geographic density: They do have a good number of hospitals and operations in certain areas. These locations allow for a somewhat greater efficiency due to the proximity of their facilities.
  • Switching costs for health providers: Because of the complex nature of healthcare, once doctors have developed a certain proficiency and relationship with their current hospitals it is not easy for them to switch over to others. However, in recent times they seem to have been decreasing in favor of more competition as doctors now have more options, which reduces the moat.

Risks to the Moat and Business Resilience

  • Regulatory Changes: As a major healthcare player, Tenet is heavily influenced by any changes in the healthcare system, including changes to Medicare and Medicaid programs. Any major changes to reimbursements or new regulatory hurdles could have an adverse impact.
  • Competition: As discussed above, the healthcare space is intensely competitive and could further increase as the shift to ambulatory care accelerates. Companies such as HCA Healthcare and Community Health systems have also implemented cost-saving and operational efficiency programs that may lead to stronger competition.
  • Cybersecurity Attacks: As a major provider of healthcare, data breaches and cyberattacks on Tenet’s systems could lead to loss of data and cause massive disruptions to the business.
  • Leverage and Debt: The high levels of debt in Tenet’s balance sheet mean that they can become more sensitive to changes in interest rates and could also face difficulties in servicing debt in case of financial distress, affecting their growth prospects.
  • Labor costs and supply chain issues: As experienced in the past couple of years, high inflation, and supply-chain issues can reduce profitability of the firm.
  • Economic Downturn: Macroeconomic factors such as economic slowdowns or recessions can have a profound effect on their business.

Understandability Assessment

Tenet’s business model can be difficult for investors outside of the health industry to fully understand due to the complex relationships between insurance providers, healthcare facilities and the government. There is also added uncertainty with regulatory frameworks that can change often. However the underlying business model is also relatively simple and easy to follow, with profits primarily generated from their facilities. For these reasons, a ranking of 3 out of 5 is given to understandability.

Balance Sheet Health

Their balance sheet health is given a 3 out of 5. Even though the company has reduced debt levels over the past few years, they still have a large amount of debt to service which creates risk for the company. They also have a quite large amount of intangible assets and goodwill, which increases risks for the business, since value could be impaired.

Recent Concerns and Controversies

  • Tenet is currently facing a high amount of labour and supply chain costs and is implementing initiatives to mitigate them.
  • In 2023, their net income took a big hit due to changes in debt and related interest expense.
  • While the company has focused on decreasing debt, their current debt load is still very high, leaving the company exposed in case of adverse market conditions.
  • The company has taken on some additional litigation liabilities, which increases their future uncertainty.