Tenet Signs with Keystone MHP - Analyst Blog

To provide coverage to two Philadelphia hospitals, Tenet Healthcare Corporation (THC) has agreed to sign with Keystone Mercy Health Plan (MHP), which is a Medicaid managed care program in Philadelphia. However, the financial terms of the deal were not disclosed.

Keystone MHP serves more than 300,000 members, and covers Hahnemann University Hospital and St. Christopher's Hospital for Children in Philadelphia, which offer patients access to a number of nationally recognized programs.

According to the deal signed, Tenet will continue to provide high quality care to the members of Keystone MHP. In addition, the agreement will also cover physicians employed by subsidiaries of the two hospitals.

Keystone MHP also has an agreement with Drexel University College of Medicine, which represents Hahnemann's largest contingent of physicians.

Third Quarter Review

Tenet's third-quarter adjusted loss from continuing operations was 1 cent per share, lagging the Zacks Consensus Estimate of 5 cents per share.

The third quarter 2010 earnings excluded the deferred tax benefit of $1.75 per share and early extinguishment of debt loss of 6 cents per share. The results were flat from the loss of 1 cent in the year-ago quarter, on account of the soft economy which continued to challenge volume growth and exerted pressure on the operating margin.

Exclusive of deferred tax benefits and debt losses, Tenet projected a revised range for normalized net income attributable to its shareholders of $110 million to $140 million, with a revised range for earnings per share of 22−28 cents for full year 2010. Tenet has forecasted net income for 2010 to range from $1.08 billion-$1.11 billion, during the third quarter earnings.

Tenet also raised the lower end of its 2010 guidance for adjusted EBITDA to a range of $1.05 billion to $1.10 billion, from the prior range of $1.04 billion to $1.10 billion. Tenet also forecasts the adjusted EBITDA margin in the range of 11.4%-11.8% for 2010.

Currently, Tenet is trying hard to ward off the ongoing unsolicited takeover bid from Community Health Systems Inc (CYH). However, the latter is determined to buy Tenet, even when the company has adopted a poison pill strategy against the takeover.

Tenet therefore anticipates growth in 2011 on the back of improved patient volume trends, which have been moving in the right direction even in the weak economy. Tenet expects its 2011 earnings to be boosted by 37% - 50% each year from 2010 to 2015.

Tenet also anticipates EBITDA to grow at an average of 11% - 16% on average revenue growth of 4% - 6% from 2010 to 2015 on the back of a mix of targeted acquisitions and organic growth. Additionally, Tenet expects its EBITDA for 2011 to be in the range of $1.15 billion to $1.25 billion, up as against the company's EBITDA estimate of $1.05 billion to $1.10 billion for 2010.

Agreement of Analysts

Over the last 30 days, 2 out of the 18 analysts covering the stock have nudged up their estimates for the fourth quarter of 2010. However, 5 of them have revised the same downward. For the first quarter of 2011, 7 out of 11 analysts revised their estimates upwards.

1 of the 12 analysts following the stock has raised their earnings estimates for fiscal 2010 with three downward revisions over the last 30 days, owing to a weak economy, along with declining commercial enrollment and the deferral of elective procedures.

However, 2011 estimates witnessed an upward bias from 13 out of 19 analysts, with only 1 analyst moving in the opposite direction, primarily attributable to improving patient volumes and expectation of revenue growth over the long term. Tenet also believes that as the economy revives, EBITDA will go up with the reduction in bad debt expenses.

Magnitude of Estimate Revisions

The fourth quarter didn't witness any revision in the estimates over the past 30 days, while the estimates climbed by two pennies in the first quarter of 2011.

For fiscal 2010, estimates plummeted by a penny over the last 30 days while the estimates for fiscal 2011 increased by 5 cents over the same period. The uptrend shows the company's ability to focus on cost efficiencies, control labor costs in a fluctuating patient volumes environment.

Our Take

We believe that Tenet will efficiently provide services to Philadelphia hospitals and their doctors, which offer a unique mix of adult and pediatric specialty services that makes them a key part of the Philadelphia community.

In addition, we believe that volume growth can significantly help achieve future profitability, including growth through the acquisition of hospitals and other health care facilities. We also expect appropriate reimbursement levels and cost control across the portfolio of hospitals to facilitate better cost management and business operations.

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.

 
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