M&A Risks And Medicaid Reliance Will Sour Future Prospects

Key Takeaways

• Heavy reliance on payer mix and patient acuity improvements may not sustain long-term revenue growth.
  
• Prioritizing share buybacks could indicate focus on short-term gains over organic growth, risking long-term earnings stability.
  
• Strong EBITDA growth and effective cost management, combined with strategic M&A and share buybacks, position Tenet Healthcare for sustained revenue and earnings enhancement.

Catalysts

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

• The company's growth prospects may be hindered by the heavy reliance on improving payer mix and increasing patient acuity. This may not be sustainable long term, potentially impacting revenue growth if these factors do not continue to improve at current rates.
  
• Although the company is positive about strong M&A opportunities in the Ambulatory segment, maintaining this level of investment without a competitive edge could lead to overstretched resources and potentially impact net margins if these new centers do not perform as expected.
  
• A significant portion of the company’s first-quarter revenue performance was bolstered by favorable one-time Medicaid supplemental revenues. If these do not continue or decrease in the future, it could potentially lead to a decline in revenue, impacting earnings.
  
• While they have been effectively managing labor costs and reducing contract labor expenses, sustaining these improvements could be difficult amidst industry-wide challenges, potentially affecting net margins if labor costs rise unexpectedly.
  
• Share buybacks have been prioritized, which might suggest an attempt to artificially inflate earnings per share rather than focusing on organic growth opportunities. This could negatively impact long-term earnings if the buybacks do not translate into genuine growth via improved operations or revenue expansions.

Tenet Healthcare Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tenet Healthcare compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tenet Healthcare's revenue will grow by 2.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 7.1% today to 5.0% in 3 years time.
• The bearish analysts expect earnings to reach $1.1 billion (and earnings per share of $13.97) by about May 2028, down from $1.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, up from 10.2x today. This future PE is lower than the current PE for the US Healthcare industry at 21.1x.
• Analysts expect the number of shares outstanding to decline by 4.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.85%, as per the Simply Wall St company report.

Tenet Healthcare Future Earnings Per Share Growth

Risks

• Tenet Healthcare has demonstrated a strong start to the year with 14% growth in consolidated adjusted EBITDA over 2024, indicating potential for continued revenue and earnings growth if current trends persist.
  
• The company's Hospital Segment saw adjusted EBITDA growth of 12%, supported by a 4.4% increase in same-store hospital admissions, suggesting sustained demand that could positively impact overall revenue.
  
• Tenet Healthcare has effectively managed operational costs including a 320 basis point improvement in adjusted EBITDA margin, which could help maintain or improve net margins.
  
• The company's strategic focus on M&A activity, with an annual investment of approximately $250 million in the Ambulatory space, shows intent to drive revenue through expansion of high-growth service lines.
  
• Tenet Healthcare plans to continue active share repurchases, leveraging significant cash flow generation, which could bolster earnings per share by reducing the number of shares outstanding.

Valuation

• The assumed bearish price target for Tenet Healthcare is $137.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Tenet Healthcare's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $230.0, and the most bearish reporting a price target of just $137.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $22.3 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 6.8%.
• Given the current share price of $159.57, the bearish analyst price target of $137.0 is 16.5% lower.
• 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.