Tenet Healthcare Checks In With A Big Beat

Tenet Healthcare’s second-quarter results had Wall Street feeling much better on Friday. Shares surged 17.2% to $233.20 after the hospital and ambulatory surgery operator reported adjusted earnings of $6.12 per share, up 52.2% from a year earlier and comfortably ahead of the $4.26 consensus estimate. Net operating revenue grew 6.8% to $5.63 billion, topping expectations of $5.43 billion, while adjusted EBITDA climbed 16.3% to $1.30 billion. Separately, GAAP earnings of $9.84 per share included a substantial benefit from $413 million of contract-termination revenue related to CommonSpirit. Tenet excludes that item from both net operating revenue and its adjusted results, which still showed that the underlying quarter was plenty healthy on its own.

Tenet’s hospitals did more than admit additional patients — they converted those volumes into sharply higher profit. Segment revenue increased 6% to $4.24 billion, while adjusted EBITDA jumped 22.3% to $762 million and the margin expanded to 18% from 15.6%. Admissions rose 2.3%, adjusted admissions gained 2.6% and revenue per adjusted admission advanced 3.3%. Higher-acuity procedures, increased commercial employer revenue and tighter expense management helped offset weaker exchange admissions. Hospitals also recognized $92 million of favorable Medicaid supplemental revenue related to prior years, compared with $70 million in last year’s quarter. That provided some assistance, although the broader margin improvement extended well beyond the incremental $22 million benefit.

The USPI ambulatory surgery business delivered a different mix of growth. Revenue rose 9.3% to $1.39 billion and adjusted EBITDA advanced 8.8% to $542 million. Same-facility surgical cases declined 1.2%, but revenue per case increased 6.3% as Tenet continued shifting toward higher-acuity and more valuable procedures. That helped lift same-facility revenue by 5%, although the segment’s EBITDA margin edged down to 39% from 39.2%. Tenet’s surgery centers made fewer cases count for more, although the diagnosis would improve considerably if procedure counts recovered.

Management followed the quarter by raising nearly every major full-year forecast. Tenet now expects adjusted earnings of $20.30 to $21.69 per share, up sharply from its previous range of $16.38 to $18.68 and well above the $17.94 Wall Street consensus at the midpoint. Net operating revenue guidance increased to $21.9 billion to $22.5 billion, while the midpoint of adjusted EBITDA guidance rose by $295 million and the midpoint of adjusted free cash flow guidance increased by $225 million. First-half adjusted free cash flow nevertheless slipped to $1.42 billion from $1.47 billion. The midpoint of the new full-year range implies approximately $1.45 billion during the second half, slightly more than Tenet generated during the first. Tenet repurchased $1.04 billion worth of shares during the quarter, and its board added another $2 billion to the authorization. With stronger margins, higher guidance and core operations exceeding expectations, Tenet gave Wall Street a prognosis it was happy to accept.

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