Morningstar

Tenet Earnings: Improving Medical Utilization and Labor Trends Boost 2023 Outlook Mildly

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Securities In This Article
Tenet Healthcare Corp
(THC)

Tenet Healthcare THC turned in strong first-quarter results, and management raised its 2023 outlook mildly. Our 2023 assumptions were already on the strong end of management’s new guidance ranges, and we do not anticipate materially changing our $95 fair value estimate, which remains well above recent share prices. Also, while our no-moat rating remains, 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 $5.0 billion in net operating revenue (above previous guidance of $4.7 billion-$4.9 billion), adjusted EBITDA of $832 million (above previous guidance of $750 million to $800 million) and adjusted EPS of $1.42 (above previous guidance of $1.00 to $1.23). Management highlighted several factors that contributed to those strong results. First, medical utilization appears to be improving with high-single-digit growth in same-facility cases at both its ambulatory surgery centers and hospitals, including 14% non-COVID-19 hospital admission growth. Second, contract labor use appeared to peak in September 2022 and continued to decline in early 2023 to 6% of salary, wage, and benefit costs in the first quarter of 2023 versus 7% in the fourth quarter, which could have cost and capacity implications going forward. Also, management said its renegotiations with commercial insurers continued to yield results that better reflect recent inflation trends, as those multiyear agreements expire.

Looking to the future, management only mildly raised its guidance for 2023 to primarily capture its first quarter outperformance and, if current trends continue, we would not be surprised to see additional upticks in guidance through the rest of the year.

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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About the Author

Julie Utterback, CFA

Senior Equity Analyst
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Julie Utterback, CFA, is a senior equity analyst, AM Healthcare, for Morningstar*. She focuses on medical technology and service companies. She covers managed care organizations including UnitedHealth, service providers like HCA, medical suppliers such as Baxter, and life sciences companies like Danaher. She is also the chairperson of the equity research team’s capital allocation methodology.

Before joining Morningstar in 2005, Utterback was an equity analyst at State Farm Insurance for several years. Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry, and initially she primarily 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.

Utterback holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign’s Gies College of Business. She also holds the Chartered Financial Analyst® designation.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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