Jefferies Downgrades Tenet As It Approaches Full Health

Tenet Healthcare Corp THC shares are up 128 percent year-to-date, reflecting cost-cutting efforts and earnings stabilization. But given the firm’s gains in top-line growth and multiple expansion, Jefferies expects the rally to come to an end.

The Rating

Analyst Brian Tanquilut downgraded Tenet from Buy to Hold and raised the price target from $28 to $38.

The Thesis

By Jefferies calculations, Tenet’s valuation relative to 2019 estimates for earnings before interest, tax, depreciation and amortization is about right for the firm’s growth prospects.

“Meaningful upside now hinges mostly on the monetization of Conifer at a valuation above 10-times EBITDA,” Tanquilut said in a Friday note.

The potential sale of Conifer could deleverage Tenet’s debt, but not enough to drive significant near-term multiple expansion, the analyst said.

At the same time, Jefferies expects that any long-term EBITDA growth depends on 2-percent volume growth in Tenet’s hospitals — a rate achieved only twice in the last three years. The hospital industry isn’t seen to achieve meaningful volume growth as increasing patient out-of-pocket costs stunt health care services.

“The growth acceleration needed to drive multiple expansion seems unlikely given sector headwinds,” Tanquilut said.