TENET HEALTHCARE (THC:NYQ)

18 MARCH 2014 COMPANY INFORMATION

Ticker Market Sector Share Price 18/03/2014 52 Week High 52 Week Low Market Cap Dividend Dividend Yield 12 Month Profit/Loss Duomo Capital Rating THC:NYQ S&P 500 US HEALTHCARE 40.70 USD 49.48 USD 36.87 USD 3.88bn N/A N/A -7.92% SELL

INDUSTRY OVERVIEW
HEALTHCARE PROVIDERS AT THE CORE OF A COMPLEX INDUSTRY 2014 is a pivotal year for the healthcare industry as a whole, as stock market gains, company cost reduction efficiencies and wider regulation breaks are likely not to continue at the same pace as in 2013, with additional downside risks present. Due to the supply chain of the healthcare industry being so interrelated and complex in terms of payment structure (Figure.1), extra costs (or profits) applicable for a particular industry segment are distributed along the chain to the point of consumption, which is often healthcare providers (in the form of hospitals, clinics and care facilities). This effect is particularly apparent when there are industry-wide acts, forces and regulations, which not only raise the exposure of these pressures from suppliers and customers, but present their own unique pressures upon the healthcare provision segment itself.

TENET HEALTHCARE (YTD)

Figure 1: Simplified diagram of pressures on Healthcare Provision revenues.

One such act is the Affordable Care Act ACA, whereby patients within 130% of the US poverty line can receive federally funded healthcare plans through an insurance exchange. This has caused a realignment of business models across the healthcare industry in preparation for an estimated 20-30% loss in revenue. This is a result of lower service reimbursements for healthcare providers from the government and a loss of custom for healthcare insurers as ACA participation capacity is reached by 2018. This has caused healthcare providers to focus on cost saving measures and long-term synergies such as horizontal and vertical M&A activity which is often funded by debt in absence of significant revenue growth. In addition, supply and provision contracts are renegotiated for enhanced terms amongst other cost saving initiatives. An increased number of ACA enrolees should diminish the strain of the 48 million uninsured upon the healthcare industry in the long-term with a payment attached to each patient rather than some with none. With a mixed economic outlook in the USA take-up amongst the uninsured has been slow. Instead ACA has created an alternative for employers (notably those with extortionate premiums) to switch to a lower priced premium, especially if economic conditions worsen. This has two key impacts as consumer power is strengthened which increases cost pressures, and the strong revenue sources generated from established healthcare insurers are gradually replaced with lower federal rebates. QE programme tapering may create further pressure on rebates as employee healthcare insurance policies are renegotiated with providers/insurers due to increased equity/asset devaluation. As an aside, healthcare providers are also under pressure from internal forces with federal rate cuts, physician shortages and limits on patient readmission all contributing to a climate that makes significant revenue growth un-viable against cost containment. A resultant issue that may be faced in 2014 is that cost cutting will only support industry growth so far without the revenue stimulus to support it.
This research article does not constitute investment advice.

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TENET HEALTHCARE (THC:NYQ)

18 MARCH 2014 COMPANY INFORMATION
Ticker Market Sector Share Price 18/03/2014 52 Week High 52 Week Low Market Cap Dividend Dividend Yield 12 Month Profit/Loss Duomo Capital Rating THC:NYQ S&P 500 US HEALTHCARE 40.70 USD 49.48 USD 36.87 USD 3.88bn N/A N/A -7.92% SELL

COMPANY RESEARCH
TENETS GROWTH CREATES AN EXPOSURE TO INDUSTRY HEADWINDS Tenet Healthcare Corporation (THC:NYQ) is a US based healthcare services company operating 77 acute care hospitals, 173 outpatient centres, 5 health plans and 6 accountable care organisations. Tenet also includes Conifer Health Solutions who help to optimise financial health within the healthcare industry, in addition to the recent acquisition of Vanguard Health Systems (another healthcare provider). POSITIVE ASPECTS Since 2009 Tenet have dramatically outperformed the healthcare industry (and most of the S&P500) with an 887% gain in terms of share price. Although, over the last 12 months performance has become increasingly mixed with a 7.92% loss. This share price strength is due to several strategic acquisitions (both horizontally and vertically) to consolidate Tenets influence, positioning and purchasing power within the industry, as Tenet is small compared to industry behemoths such as UnitedHealth (NYQ:UNH). Further share price growth may be reliant on additional M&A activity. Tenet also have some core assets within their business model that will temper any downside. The Conifer division of the company not only provides a diversified revenue source but can be used to optimise Tenets own financial health. Tenet also have a strong Managed Care revenue stream (58% of total) with favourable rates, volumes and outpatient revenues contributing 6.3% higher revenue in 2013 than 2012. NEGATIVE ASPECTS Tenet shows signs of being overbought over the last 5 years, with the pace of recovery receding in 2013 against a firmer operating environment. Furthermore, Tenet has an above average P/E ratio (37.58) in comparison to the industry (24.77) which reflects the poor Q4 EPS performance and the rapid share price inflation in 2013. This firmer operating environment is partially attributable to a mixed economic environment for US equities which is set to continue throughout 2014 with further tapering set to produce natural downwards pressure for the Tenet share price. It may also force the small to large firms in the S&P500 to evaluate healthcare costs, such as renegotiating costs for Tenets currently lucrative managed care scheme. The low switching costs from the relatively expensive managed care schemes to cheaper insurance exchanges could erode the existing negative operating margins further. Tenet have prepared for the much debated Affordable Care Act ACA through expansion and were set to benefit from an increased volume of federally accountable, rather than unpaid patients (11% of revenues). However, the ACA enrolment rate has been slower than expected meaning that Tenet have prepared for a change that may not be realised for many years, which impacts the ROI of their recent growth activities. In preparing for the ACA, Tenet have amassed a large debt holding. The Q4 Debt to Equity ratio of 14.36 is significantly higher than the competition and presents a considerable financial risk, especially when taking into account already declining cash flows and the requirement of possible restructuring activity if ACA enrolment is muted. As Tenet only operates in the USA it also poorly diversified against country specific risk. It also has a large presence in states with high uninsured populations such as Texas (21%), California (19%) and Florida (13%). An overtone of Tenets capital investment strategy is that it can monetise this uninsured population better if expected volume is achieved. However, If the poor ACA enrolment trends continue, this exposure may negatively impact revenues and EPS figures throughout 2014.
This research article does not constitute investment advice.

TENET HEALTHCARE (YTD)

CONTACT US
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