Tenet Healthcare (THC) is poised to benefit from the shift toward outpatient care and a stronger balance sheet, though these factors have yet to be reflected in the stock's valuation, Morgan Stanley analysts said Wednesday in new coverage of the hospital and ambulatory care operator.

Morgan Stanley initiated Tenet with an overweight rating and a $165 price target, citing the company's strong positioning to benefit from the shift toward outpatient care. Tenet operates 518 ambulatory surgical centers across 37 states, making it the largest provider in a fragmented market, with nearly double the market share of the next-largest operator.

The shift to outpatient care is expected to be a meaningful driver of volume growth for Tenet, with orthopedics as the biggest growth vector over the next five years, alongside urology, cardiology, gastroenterology, and cancer treatments.

Analysts at Morgan Stanley noted that advancements in surgical techniques and a lower cost structure are enabling higher acuity cases to be performed in these settings.

Tenet has repositioned its portfolio while generating more than $7 billion in proceeds from asset sales over the past five years. Management has also reduced debt while expanding margins, leading to stronger free cash flow and an increased pace of stock buybacks. Analysts see potential for share repurchases in the coming years.

Uncertainty around potential changes in healthcare policy and government spending cuts may be weighing on the stock in the near term. However, despite improvements in margins and a reduced net leverage ratio, Tenet's valuation multiple has compressed. Morgan Stanley sees a stronger case for multiple expansion than contraction from here.