Tenet Earnings: Boosting 2023 Outlook on Strong Recent Trends

Tenet THC turned in strong second-quarter results, and management raised its 2023 outlook to recognize these trends. However, even after making mild adjustments to our near-term estimates on these recent results, our fair value estimate of $95 has not changed materially and still remains moderately above recent share prices. Also, while we have a no-moat rating on the firm, we recognize that Tenet’s operations have improved substantially in recent years, and we expect returns on invested capital to remain above capital costs throughout our five-year forecast period.

In the quarter, Tenet turned in better-than-expected results, helped by improving medical utilization, labor cost trends, and share repurchases. Specifically in the quarter, Tenet generated $5.1 billion in net operating revenue (above previous guidance of $4.8 billion-$5.0 billion), adjusted EBITDA of $843 million (above previous guidance of $765 million to $815 million) and adjusted EPS of $1.44 (above previous guidance of $1.07 to $1.30). Management highlighted several factors that contributed to those strong results. First, medical utilization increased, including 7% growth in same-facility cases at its ambulatory surgery centers and 5% growth in non-COVID admissions on a same-hospital basis. Second, labor cost pressures continued to ease from peak levels in 2022, which is easing pressure on margins. Finally, we continue to expect that Tenet’s negotiations with commercial insurers will better reflect recent inflation trends, going forward, as these multiyear agreements expire and are renegotiated.

Looking to the future, management mildly raised its guidance for 2023 to roughly capture its second-quarter outperformance. After making minor tweaks to our near-term expectations, we are maintaining our fair value estimate and continue to view Tenet shares as moderately undervalued.