XLV - Tenet Healthcare: Earnings Headwinds With Mixed Technicals

Summary

• The Health Care sector has seen a swift drop in its relative strength as tech catches a new bid.
• Health Care Providers & Services stocks have suffered this year.
• Tenet shares appear cheap, but there is earnings uncertainty looking ahead to 2023.

Have some Health Care stocks finally hit their relative peak? The iShares U.S. Healthcare Providers ETF ( IHF ) rallied sharply versus the S&P 500 from November last year through much of last week. A much-better-than-expected CPI report then sent interest rates sharply lower, leading to a tech rally and a shift away from defensive stocks – healthcare names being among them. One provider got blasted post-earnings recently, but is it a buy now?

Healthcare Providers Losing Relative Luster

According to Bank of America Global Research, Tenet Healthcare ( THC ) provides healthcare services primarily through the operation of general hospitals and related healthcare facilities. Its hospitals offer acute care services, operating and recovery rooms, radiology services, and others. Through its subsidiaries, partnerships, and joint ventures, including USPI, THC operates 65 acute care hospitals, 18 short-stay surgical hospitals and about 500 outpatient centers in the U.S.

The Texas-based $4.6 billion market cap Health Care Providers & Services industry company within the Health Care sector trades at a low 8.5 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal .

Tenet continues to work on shifting operations and services toward better growth and less capital-intensive activities. The company has risks regarding how the macroeconomy evolves, unlike some other defensive firms within the sector. Its Ambulatory Surgery Center core business is at particular risk, but there is long-term free cash flow opportunity through that segment. There are other downside risks including lower volume levels post-Covid, government reimbursement changes, and labor costs pressuring margins.

On valuation, analysts at BofA see earnings falling sharply this year after a slight 2021 decline, but more per-share losses are seen in 2023 before an eventual turnaround. The Bloomberg consensus forecast is much more sanguine than BofA’s tepid outlook.

Still, shares trade at low operating and GAAP P/Es and an extremely low EV/EBITDA multiple. Finally, free cash flow is forecast to turn positive next year. Overall, I think shares are undervalued, and generally agree with Seeking Alpha’s B rating .

Tenet: Earnings, Valuation, Free Cash Flow Forecasts

Looking ahead, corporate event data from Wall Street Horizon show an unconfirmed Q4 earnings date of Tuesday, February 7. The calendar is light aside from that date, however.

Corporate Event Calendar

The Options Angle

Tenet shares plunged following a dreadful Q3 earnings report. According to Option Research & Technology Services (ORATS), per-share profits topped expectations at $1.44 vs a $1.26 consensus, but revenue and EBITDA misses sent the stock cratering 31%, much more than the 7.8% implied move. Analysts expect $1.78 in EPS in the next quarterly report with an 8.2% implied move using the nearest-expiring at-the-money straddle.

A Harsh Q3 Earnings Reaction

The Technical Take

THC has stair-stepped lower over the last year. There are two layers of resistance – the first near $50 and the second in the mid-high $60. I see support via a near-term double-bottom between $36 and $38. Also notice that RSI is perking up, so there are signs of life for this Health Care name, but that indicator is still in the bearish 20 to 60 range.

Unfortunately for the bulls, though, there’s high volume-by-price between $50 and $60 – that should be significant bearish overhead supply. Overall, it’s a somewhat bearish chart.

THC: Trending Lower, But Near-Term Support

The Bottom Line

Tenet looks like a good value here, but there are fundamental risks. The technical picture is also mixed, but leans bearish. Based on those two takes, I have a hold on the stock right now.

For further details see: