Tenet Ahead of Zacks Consensus - Analyst Blog

On August 3, 2010, Tenet Healthcare Corporation (THC) reported its second-quarter income from continuing operations of $35 million or 7 cents per share, slightly ahead of the Zacks Consensus Estimate of 6 cents. This also compares favorably with income of $2 million in the year-ago quarter.

Despite a soft macroeconomic environment, Tenet’s improved results were attributable to growth in top-line and earnings before interest, taxes, depreciation and amortization (EBITDA) along with increasing cost efficiencies. Further, the decline in admissions was offset by the increased showing in the quarter.

Tenet’s net income was $25.0 million or 5 cents in the reported quarter as opposed to a loss of $15.0 million or 3 cents in the prior year quarter. The results include losses from discontinuing operations in both the quarters of $10.0 million or 2 cents and $17.0 million or 4 cents, respectively.

Behind the Headlines

Net operating revenues in the reported quarter climbed 3.3% year over year to $2.3 billion, primarily due to the 2.0% growth in commercial revenues, driven by higher commercial acuity, increased unit revenues, and improved commercial payer mix. This increase in revenues was net of unfavorable adjustments of $28 million for the estimated impact on the Medicare disproportionate share hospital payments of $20 million and the portion of bad debt of $8 million that will not be reimbursed by Medicare.

Commercial managed care admissions and outpatient visits declined by 7.2% and 5.4%, respectively, while total admissions and outpatient visits declined by 2.0% and 0.8%, respectively during the quarter. Total adjusted admissions declined 0.6%.

Tenet witnessed a year-over-year increase of 2% in the total controllable operating expenses in the reported quarter. This increase includes a 2.1% rise in salaries, wages and benefits. Supplies expense was unchanged during the quarter and other operating expense of Tenet jumped 5.5%.

Bad debt expense increased 3.6% year over year in the reported quarter. The increase was primarily attributable to a year-over-year rise in uninsured admissions and outpatient visits coupled with a decline in the self-pay collection rate in the second quarter of 2010. However, the decline in the rate was partially offset by a $28 million favorable adjustment for Medicare bad debts.

Tenet posted adjusted EBITDA of $268 million in the quarter, up 8.9% year over year from $246 million in the prior year quarter. Adjusted EBITDA margin was 11.6%, a 60-basis point increase during the quarter.

Tenet exited the quarter with cash and cash equivalents of $711 million and capital expenditures for the quarter came in at $77 million.

As of June 30, 2010, total assets of Tenet were $7.8 billion and shareholders equity was $772 million.

Outlook

With ongoing and incremental cost efficiencies, Tenet raised its 2010 guidance on June 14 for adjusted EBITDA to a range of $1.035 billion to $1.100 billion, from the prior range of $0.985 billion to $1.050 billion. The outlook also projects a revised range for net income attributable to Tenet shareholders of $135 million to $204 million, up from $70 million to $94 million. The revised range for earnings per share of 27−40 cents was up from 14−19 cents.

Tenet further expected increased earnings of 34−41 cents per share, up from a previous forecast of 24−32 cents, excluding discontinued operations, litigation and investigation costs.

Management stated that the 2010 adjusted EBITDA outlook will be impacted by incremental health care information technology expense of $25 million, which was $40 million in the prior outlook.

Tenet’s revised outlook for 2010 was attributable to lowered controllable operating expenses by $50 million, resulting from better labor cost management, reduced clinical information technology expense and improving malpractice costs.

Our Recommendation

We believe the volume declines are attributable to factors that have affected many hospital companies, including the impact of the recession on consumer demand, decreases in demand for invasive cardiac procedures, increased competition and utilization pressure by managed care organizations, as well as benefit plan design changes.

Though Tenet has been focusing on cost efficiencies, controlling labor costs in a fluctuating patient volumes environment is a tough challenge for Tenet, as inflation and technology improvements drive supply costs higher, and the efforts to control supply costs through product standardization, bulk purchases and improved utilization become difficult.

Overall, we strongly believe that volume growth can significantly help in boosting the earnings outlook of Tenet and its labor cost management in future.