Tenet Healthcare Corporation (THC) reported its fourth-quarter income from continuing operations of $52 million or 10 cents per share, ahead of the Zacks Consensus Estimate of 8 cents per share. This also compares favorably with income of $16 million or 3 cents per share in the year-ago quarter.

In fiscal 2010, Tenet posted income from continuing operations of $1.10 billion or $2.01 per share, ahead of the Zacks Consensus Estimate of 29 cents per share. This also compares favorably with income of $212 million or 43 cents per share in the year-ago quarter.

The improved results were due to strong volume trends in November and December of 2010, which has continued in January and February of 2011. An increase in paying outpatient visits has also contributed to the growth.

Tenet’s net income was $74.0 million or 14 cents per share in the reported quarter, as opposed to $21.0 million or 4 cents in the prior-year quarter. The results include income from discontinuing operations of $22.0 million or 4 cents in the reported quarter and $5.0 million or 1 cent in the prior-year quarter.

On the other hand, net income in fiscal 2010 included income from discontinuing operations of $17.0 million or 3 cents in fiscal 2010 and loss of $31.0 million or 6 cents in the prior-year. Tenet’s net income was $1.12 billion or $2.04 per share as opposed to $181.0 million or 37 cents in 2009.

Behind the Headlines

Net operating revenues improved in the reported quarter with $2.30 billion, as against the $2.26 billion reported in the prior-year quarter. However, it lagged the Zacks Consensus Estimate of $2.35 billion. Net operating revenues increased 2.1% year over year to $9.21 billion, but was behind the Zacks Consensus Estimate of $9.25 billion.

During the quarter, Tenet’s net patient revenues per adjusted patient day increased by 2.4% on a year-over-year basis.

However, admissions and paying admissions plummeted during the quarter by 2.0% and 2.2%, respectively; whereas outpatient visits and paying outpatient visits increased by 2.9% and 3.2%, respectively compared to the fourth quarter of 2009. Additionally, Tenet’s adjusted admissions climbed up by 0.4% compared with the fourth quarter of 2009.

Tenet witnessed a year-over-year decrease of 1.8% in total controllable operating expenses in the reported quarter. This increase includes a favorable variance in malpractice expense. Total controllable costs per adjusted patient day declined 1.0% during the reported quarter.

Bad debt expense escalated 5.5% year-over-year in the reported quarter, while the ratio of bad debt expense to net operating revenues jumped to 8.3% from 8.0% in the prior year quarter. The sum of uninsured and charity admissions were, however, flat in the fourth quarter, compared to the fourth quarter of 2009.

Tenet posted adjusted EBITDA of $281 million in the quarter, up 28.9% year-over-year from $218 million in the prior-year quarter. Adjusted EBITDA margin was 12.2%, a 260-basis point increase during the quarter. In fiscal 2010, adjusted EBITDA was $1.05 billion, up 6.9% from $982 million in 2009. Adjusted EBITDA margin was 11.4% versus 10.9% in 2009.

The impressive results were attributable to strong pricing growth and continued excellent cost management.

Tenet exited the quarter with cash and cash equivalents of $405 million, up $7 million from September 30, 2010. Adjusted net cash provided by operating activities was $180 million in the fourth quarter of 2010, up 13.2%.

Adjusted free cash flow used in continuing operations was $16 million in the quarter, compared with the use of $33 million in the prior year quarter. This was primarily the result of a decrease in tax payments, partially offset by an increase in working capital.

Net cash provided by operating activities was $175 million in the reported quarter as against the $141 million in the fourth quarter of 2009. The increase in cash includes the receipt of $50 million from the sale of certain medical office buildings and the use of $21 million to purchase eleven outpatient centers.

During the quarter, Tenet’s California Provider Fee Program received Centers for Medicare & Medicaid Services (CMS) final approval on January 18, 2011, which will contribute $64 million net revenue in 1Q11.

As of December 31, 2010, total assets of Tenet were $8.50 billion and shareholders equity was $1.77 billion.

Acquisition Update

On December 9, Community Health Systems Inc. (CYH) had re-bid to acquire Tenet, though with an identical offer as it had given on November 12 in the form of a letter, which was rejected.

Community Health had offered to acquire all the outstanding shares of Tenet for $6.00 per share, including $5 a share in cash and $1 per share of its common stock. This offer also provided 40% premium over Tenet’s closing price of December 9.

Further, the deal was valued at $7.3 billion and Community Health was to make an equity offer of $3.3 billion and obtain about $4 billion of debt to finance the acquisition deal. However, the deal does not appear to be in favor of Tenet, as it undervalues the company.

Tenet is working hard to thwart the hostile takeover bid from Community Health, but the latter is determined to buy Tenet, even when the company has adopted a poison pill strategy against the takeover.

On December 20, 2010, Community Health announced its intention to nominate its directors for election at the 2011 annual meeting of Tenet, and on January 14, 2011, a full slate of 10 independent director nominees was nominated. Tenet’s entire board is up for re-election at the 2011 annual meeting, which has been delayed until November 3, 2011.

Outlook

Tenet has re-affirmed the earnings guidance for 2011, which was issued on January 12. Tenet anticipates growth in 2011 on the back of improved patient volume trends.

Accordingly, Tenet expects its 2011 earnings to be boosted by 37% – 50% each year from 2010 to 2015.

Tenet also anticipates EBITDA to grow at an average of 11% – 16% on average revenue growth of 4% – 6% from 2010 to 2015 on the back of a mix of targeted acquisitions and organic growth. Additionally, Tenet expects its EBITDA for 2011 to be in the range of $1.15 billion to $1.25 billion, up as against the company’s EBITDA estimate of $1.05 billion to $1.10 billion for 2010.

In addition, Tenet has established its 2011 outlook for net cash provided by operating activities in the range of $570 million to $740 million.

Our Recommendation

We believe that volume growth can significantly help achieve future profitability, including growth through the acquisition of hospitals and other health care facilities. We also expect appropriate reimbursement levels and cost control across the portfolio of hospitals to facilitate better cost management and business operations.

Though Tenet has been focusing on cost efficiencies, controlling labor costs in a fluctuating patient volumes environment is a tough challenge for Tenet, as inflation and technology improvements drive supply costs higher, and the efforts to control supply costs through product standardization, bulk purchases and improved utilization become difficult.

Overall, we strongly believe that volume growth can significantly help boost the earnings outlook of Tenet and its labor cost management in future.

 
COMMNTY HLTH SY (CYH): Free Stock Analysis Report
 
TENET HEALTH (THC): Free Stock Analysis Report
 
Zacks Investment Research