Summary
- Tenet Healthcare's sale of Conifer will not impact valuation significantly.
- However, the company trades below peers despite signs of business growth and ability to gradually repay debt.
- The company's shares have dropped significantly from $28 to $17.50 before rebounding to $22.
- I have decided to hold at $22 and wait for an exit at about $31.
I am holding Tenet Healthcare's (THC) shares since $28 and they are now slightly above $22, which is a massive 21% unrealized loss for me. Tenet Healthcare is faced with challenges both political and company-specific. Tenet Healthcare's share price had dropped to $17.50 before rebounding back to $22 within the month. Hence it is time to review and decide on whether I should continue to hold or cut my losses.
Investment objective
The investment objective is to ride out the current regulatory uncertainties which have kept healthcare stocks in general in a state of flux, and take a long position based on management's ability to strengthen Tenet Healthcare's balance sheet and continue its share repurchase.
Current headwinds
Tenet Healthcare employed 115,500 staff and operated 68 hospitals with approximately 17,935 licensed beds, 23 surgical hospitals, and 475 outpatient centers at the end of 2018. As one of the largest healthcare providers in the US and one of the largest outpatient surgery centers, this company is greatly exposed to policy risks and changes to healthcare regulations.
As healthcare costs rise, government policies impacting either medical insurance affordability or the curtailing of excessive fees charged to patients would have an indirect impact on Tenet’s ability to maintain price and occupancy rates. For example, there is a risk that if Medicare for All is implemented, the government could determine the cost of medical treatments and there is also a risk that the program would result in cost-cutting elsewhere, such as in medical infrastructure investments. In addition, the government becomes the single largest healthcare consumer and will have the power to determine healthcare prices (and costs).
With Tenet Healthcare's high debt load, the stock is bound to be impacted even further, with cash flow generated from operations amounting to $1 billion in 2018, which includes an interest expense of $976 million paid. Half of the company's cash flow generated goes to servicing interest payments.
With an upcoming earnings call on August 6, 2019, I wanted to have a clear picture of the long-term value of the company, including its Conifer business which is planned for a spin-off.
