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Tenet Earnings: Strong Facility Utilization Trends Boost 2023 Outlook Again

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Tenet THC reported robust third-quarter results that were roughly in line with our expectations. Our $95 fair value estimate remains intact, and following an over 30% decline in Tenet’s stock price since early September, shares look attractive to us. Positively, management raised its 2023 adjusted EBITDA outlook for a third time this year to between $3.365 billion and $3.465 billion related to strong facility utilization trends as well as effective cost controls. Despite our no-moat rating, we recognize Tenet’s leadership in the high-margin, fast-growing ambulatory care market, and we continue to forecast that Tenet’s return on invested capital will stay above its capital costs over the next five years.

This quarter, Tenet reported just under 6% growth in net operating revenue to $5.1 billion, as medical utilization remained robust on hospital adjusted admissions growth of 0.4% year over year and same-facility surgical cases growth of 4.1% across USPI. Adjusted EBITDA of $854 million was above the previous guidance of $775 million to $825 million, too. On costs, we were encouraged to see a continued wind-down of Tenet’s usage of contract labor in hospitals. With consolidated contract labor costs declining nearly 60% year over year, we believe such improvement in Tenet’s cost structure could support a stable margin within its hospital operations business going forward. Tenet did not purchase additional shares under its share repurchase program this quarter, and total share repurchases remained at $90 million for 2023.

For 2024, management is estimating a $100 million headwind related to federal and state programs, including the end of COVID-19-related funding and minimum wage regulations in California. Management highlighted that growth tailwinds should more than offset these headwinds in 2024. Also, any headwinds related to these policy changes will only have limited effects on Tenet’s hospital and ambulatory care operations in the long term, in our opinion.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Julie Utterback

Senior Equity Analyst
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Julie Utterback is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. Within the healthcare industry, she covers medical technology and service companies. She is also the chairperson of the equity research team’s capital allocation methodology.

Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry. At that time, she covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Prior to joining Morningstar, Utterback was an equity analyst at State Farm Insurance for several years. She holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign. She also holds the Chartered Financial Analyst® designation.

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