EUR 850.00 For Business Accounts Only

Morningstar | Asset Sales and Cost Improvements Remain Key to Tenet's Success

Dogged by volume challenges, continued legal troubles, and a substantial debt burden, Tenet Healthcare has finally begun to make the changes necessary to revitalize its strategy and come out the other side of this transition period on stronger footing. Catalyzed by continued agitation by its largest shareholder, Glenview Capital Management, Tenet has replaced its CEO and a handful of board members, improved its governance bylaws, and showed a willingness to reshape its portfolio as it reconsiders the strategic nature of owning its Conifer business segment. We think this flexibility is a refreshing change of pace for investors who have become increasingly frustrated by the chronic underperformance of the business.Ultimately, we think Tenet is undergoing an evolution from a multiyear, debt-fueled acquisition strategy to one of more measured growth, consolidating its presence in markets more advantagious to its competitive strengths. While a debt-laden balance sheet limits the company’s near-term capital-allocation options, we think CEO Ron Rittenmeyer has demonstrated an understanding and willingness to adapt Tenet’s strategy with its existing market position. The result has been asset sales as the company sells hospitals in noncore markets, a firmwide restructuring that looks to flatten layers of management and improve overall cost efficiency, and a refocus on providing quality healthcare that should improve Tenet’s aggregate Medicare star ratings over time.While we think Tenet lacks the scale necessary to confidently assess a scale-based cost advantage, we think it possesses many of the other attributes of a successful facilities operator. With a majority of its facilities in higher-population-growth geographies, a little less than half exposed to Medicaid expansion, and an increasing focus on outpatient care delivery, the company appears to be reasonably well positioned for the future, all things considered. Negative headlines, self-inflicted volume declines, and the hamstringing effect of debt tend to overshadow these otherwise favorable characteristics, leaving the underlying assets quite reasonably valued, in our view.