Stock Analysis

Improved Earnings Required Before Tenet Healthcare Corporation (NYSE:THC) Stock's 28% Jump Looks Justified

Published
NYSE:THC
Source: Shutterstock

Tenet Healthcare Corporation (NYSE:THC) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 61% in the last year.

In spite of the firm bounce in price, Tenet Healthcare may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.5x, since almost half of all companies in the United States have P/E ratios greater than 16x and even P/E's higher than 33x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Tenet Healthcare certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Tenet Healthcare

pe
NYSE:THC Price Based on Past Earnings March 10th 2022
Keen to find out how analysts think Tenet Healthcare's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Tenet Healthcare would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 125% gain to the company's bottom line. The latest three year period has also seen an excellent 761% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.7% each year as estimated by the analysts watching the company. That's not great when the rest of the market is expected to grow by 11% per year.

With this information, we are not surprised that Tenet Healthcare is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Tenet Healthcare's P/E

Despite Tenet Healthcare's shares building up a head of steam, its P/E still lags most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Tenet Healthcare maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for Tenet Healthcare (2 are concerning!) that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

Valuation is complex, but we're helping make it simple.

Find out whether Tenet Healthcare is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis