Expansion Of ASCs And Share Buybacks Will Influence Future Profitability, But Hospital Sales May Impact Revenue

Key Takeaways

• Tenet's ASC expansion and shift to high-margin procedures could drive revenue growth, enhance net margins, and improve overall earnings.
  
• Strategic divestitures and share buybacks enhance financial flexibility, reduce debt, and support EPS growth, benefiting shareholder value.
  
• Divestment of hospitals and regulatory uncertainties may impact revenue growth, while heavy share buybacks could restrict strategic investment opportunities and capital efficiency.

Catalysts

Operates as a diversified healthcare services company in the United States.

• Tenet Healthcare's focus on expanding its ambulatory surgical center (ASC) portfolio, with plans to invest $250 million annually in mergers and acquisitions to add new sites, is expected to fuel revenue growth through increased service offerings and market expansion.
  
• High acuity volume growth, particularly in total joint replacements within the ASCs, underscores a shift towards more complex and higher-margin procedures, which is anticipated to positively impact net margins and overall earnings for Tenet.
  
• The strategic sale of 14 hospitals, resulting in significant gross proceeds and balance sheet deleveraging, positions Tenet to operate with improved financial flexibility, potentially enhancing both net margins and earnings due to reduced debt obligations.
  
• Tenet's active share repurchase program, reflecting its intention to continue buybacks at current valuation multiples, could drive earnings per share (EPS) growth and enhance shareholder value by reducing the number of shares outstanding.
  
• Continued strong performance in the USPI segment, with projected EBITDA growth driven by effective operational execution and increased demand, suggests sustainable revenue growth and improved EBITDA margins, benefiting Tenet’s overall profitability.

Tenet Healthcare Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tenet Healthcare's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.5% today to 5.8% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $14.38) by about March 2028, down from $3.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, up from 3.7x today. This future PE is lower than the current PE for the US Healthcare industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 2.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Tenet Healthcare Future Earnings Per Share Growth

Risks

• The sale of 14 hospitals, while generating $5 billion in proceeds, could reduce future revenue streams from these divested assets, impacting overall revenue growth.
  
• The projected EBITDA growth rate for 2025 appears to be lower than previous years, signaling potential challenges in maintaining the same level of revenue growth and operational performance.
  
• There is a reliance on continued growth in high acuity volumes, particularly total joint replacements in ASCs. Any slowdown in these areas could adversely affect revenue and margins.
  
• The high percentage of free cash flow dedicated to share repurchase could limit funds available for other strategic investments, potentially impacting long-term revenue growth and capital efficiency.
  
• Potential regulatory changes in the healthcare industry could disrupt expected revenue streams, especially if there are adjustments in Medicaid or other supplemental payment structures that decrease reimbursement levels.

Valuation

• The analysts have a consensus price target of $172.295 for Tenet Healthcare based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $217.0, and the most bearish reporting a price target of just $134.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $23.2 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 7.5%.
• Given the current share price of $125.33, the analyst price target of $172.3 is 27.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.