Raising Tenet's Fair Value Estimate After 3Q Blows Away Expectations

Tenet turned in stellar third-quarter operating results that allowed management to raise its guidance for the third time this year and put it on track to beat our expectations for 2021. After raising our operating expectations moderately, we also raised our fair value estimate to $60 per share from $55 previously. Although shares continue to trade above our fair value, our very high uncertainty rating highlights the large margin of safety that we would require to make a transaction, including on the upside. For example, if the firm continues to operate at these impressive levels, including ROICs well over WACC after recent capital allocation activities like pruning underperforming assets, acquiring high-margin ambulatory surgery centers, and reducing debt on its balance sheet; we would consider raising Tenet's current no moat rating, which could also have a valuation impact all else being equal.