Morningstar | Tenet Reports Mixed 1Q, but We Don't Anticipate a Change to Our Fair Value Estimate
No-moat Tenet reported first-quarter results that were slightly below our expectations, but we don't intend to alter our $30 per share fair value estimate. One-off costs in the hospital segment and facility divestitures across the firm contributed to the weaker results. Management maintained its outlook for the year, implying 4%-7% EBITDA growth despite a first-quarter decline of roughly 780 basis points. Adjusting for a handful of discrete items would have left consolidated EBITDA up about 2% compared with the year-ago period, supporting the notion that results should improve throughout the remainder of the year.In the firm's hospital segment, same-facility equivalent admissions grew 60 basis points while revenue-per-equivalent-admission improved by 1.3%. These figures fall short of those reported by narrow-moat peer HCA (1.8% and 4.4%, respectively) but show sustained momentum despite uniquely strong results in the first quarter of 2018. However, losses on risk-based contracts and elevated malpractice expenses continue to weigh on segment profitability. These two costs alone accounted for the bulk of the 150-basis-point year-over-year decline in segment margin.
The ambulatory care and Conifer segments, however, continue to outperform on the profit front, expanding segment margins by 380 and 410 basis points, respectively. Revenue growth, on the other hand, has been harder to sustain as systemwide same-facility case growth has decelerated in the ambulatory segment over the last handful of quarters and Conifer has struggled to retain the business of divested facilities.
Cash flow was particularly weak, pressured by the expenses discussed above and a lengthening cash conversion cycle--receivable days grew by four days versus the fourth quarter. This was largely attributed to seasonality and timing effects, but we'll be looking for much improved operating cash flow over the coming quarters.
Tenet Healthcare is a healthcare services company. Through its subsidiaries, partnerships and joint ventures, including USPI Holding Company, Inc., the company operates hospitals, surgical hospitals and outpatient centers. In addition, the company's Conifer Holdings, Inc. (Conifer) subsidiary provides healthcare business process services in the areas of hospital and physician revenue cycle management and care solutions to healthcare systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities. The company has three reportable segments: Hospital Operations and other; Ambulatory Care; and Conifer.
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