U.S. healthcare services company Tenet Healthcare Corporation THC is trading comparatively cheap at the moment from a valuation standpoint. Its forward earnings multiple of 11.10X is lower than its five-year median of 11.96X and the industry average of 13.13X. The stock also looks attractively valued relative to other medical facility operators like HCA Healthcare, Inc. HCA and Encompass Health Corporation EHC, with forward 12-month P/E of 13.70X and 21.52X, respectively. Tenet Healthcare has a Value Score of A.

Image Source: Zacks Investment Research

Tenet Healthcare’s cash flow situation is also encouraging. In the trailing 12-month period, THC’s free cash flow grew 47.4% to $2.39 billion. Going by its price-to-free cash flow (P/FCF), a reliable indicator of a company’s financial health, THC is trading at 5.10X, below the industry’s average of 9.73X.

With the stock trading at a discount, we examine Tenet Healthcare’s growth drivers and challenges to determine if it presents a strong investment opportunity for investors at this time.

What’s Going Right for THC?

Tenet Healthcare’s deleveraging efforts are paying off. It exited the third quarter with cash and cash equivalents of $4.1 billion, which increased more than three-fold from the 2023-end figure. Long-term debt, net of the current portion, amounted to $12.8 billion, down 14.2% from the figure as of Dec. 31, 2023. The current portion of long-term debt totaled at an easily manageable $95 million.

Thanks to its de-leveraging efforts, its net debt to EBITDA is brought down to 2.25X, well below its five-year median of 4.72X and the industry average of 3.23X. For 2024, its adjusted EBITDA is estimated to be within the range of $3.9-$4 billion, higher than the prior projection of $3.825-$3.975 billion. It expects adjusted EBITDA margin to be in the 18.9-19.2% range. THC is likely to continue divesting its non-core and less profitable units to further repay debt and free up capital.

Tenet Healthcare is sharpening its focus on ambulatory surgery centers (ASCs) to capitalize on the increasing demand for outpatient services. In partnership with United Surgical Partners International (USPI), the company is expanding its network, optimizing operations, and targeting improved profit margins. By the end of the third quarter, USPIheld interests in 520 ASCs and 24 surgical hospitals across 37 states.

The company is also investing in AI-powered technologies to streamline both clinical and administrative processes, which should help lower costs, reduce patient wait times and boost patient satisfaction.

THC’s Earnings Estimates & Surprise History

The Zacks Consensus Estimate for 2024 adjusted earnings for THC is currently pegged at $11.37 per share, indicating a 62.9% year-over-year surge. It has witnessed three upward estimate revisions in the past 60 days against none in the opposite direction. The consensus estimate for 2024 and 2025 revenues suggests 1% and 2.5% year-over-year growth, respectively.

It beat earnings estimates in each of the past four quarters, with an average surprise of 59.9%.

THC Stock: A Cautious Hold for New Investors

Tenet Healthcare’s stock, though trading at a discount, may not be the best buy for new investors right now. While existing shareholders can benefit from the stock’s lower valuation, deleveraging efforts, growth in ASCs and favorable estimates, new buyers should exercise caution.

The broader hospital industry faces several challenges, including the new administration's focus on cutting government spending and potential changes that could affect hospital profits in the near term. Additionally, concerns about reduced funding for hospitals and the expiration of insurance subsidies add further uncertainty to the sector.

Despite Tenet Healthcare’s stock surging over 70% in the past year — outperforming both the industry average of 9.1% and the S&P 500’s 26.2% increase — much of the positive outlook seems to be priced in. As a result, there may be limited short-term upside, and prospective investors might want to wait for a more favorable entry point.

Price Performance - THC, EHC, HCA, Hospital Industry & S&P 500

Image Source: Zacks Investment Research

THC's supply costs increased nearly 10% in 2023 and 2.2% in the first three quarters of 2024. Other net operating costs also saw significant growth, nearly 13% in 2023 and 2.8% through the third quarter of 2024. As occupancy levels rise and resource utilization grows, operating costs are expected to continue increasing.

Additionally, Tenet’s Return on Invested Capital stands at 8.27%, well below the industry average of 12.89%. This suggests that the company is struggling to generate competitive returns on its invested capital compared to its peers.

With Tenet Healthcare currently carrying a Zacks Rank #3 (Hold), new investors should consider staying on the sidelines until a more attractive entry point emerges. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Tenet Healthcare Corporation (THC) : Free Stock Analysis Report

HCA Healthcare, Inc. (HCA) : Free Stock Analysis Report

Encompass Health Corporation (EHC) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research