Hospital operator Tenet Healthcare (NYSE:THC) fell short of the market’s revenue expectations in Q4 CY2024, with sales falling 5.7% year on year to $5.07 billion. The company’s full-year revenue guidance of $20.8 billion at the midpoint came in 2.4% below analysts’ estimates. Its non-GAAP profit of $3.44 per share was 21.5% above analysts’ consensus estimates.

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"2024 was an outstanding year for Tenet characterized by robust revenue growth, efficient operations, high levels of patient satisfaction and clinical quality, and a portfolio transformation that drove substantial balance sheet deleveraging," said Saum Sutaria, M.D., Chairman and Chief Executive Officer of Tenet.

Company Overview

Founded in 1967 as a small hospital operator, Tenet Healthcare (NYSE:THC) is a large hospital, surgical center, and outpatient facility operator today.

Hospital Chains

Hospital chains operate scale-driven businesses that rely on patient volumes, efficient operations, and favorable payer contracts to drive revenue and profitability. These organizations benefit from the essential nature of their services, which ensures consistent demand, particularly as populations age and chronic diseases become more prevalent. However, profitability can be pressured by rising labor costs, regulatory requirements, and the challenges of balancing care quality with cost efficiency. Dependence on government and private insurance reimbursements also introduces financial uncertainty. Looking ahead, hospital chains stand to benefit from tailwinds such as increasing healthcare utilization driven by an aging population that generally has higher incidents of disease. AI can also be a tailwind in areas such as predictive analytics for more personalized treatment and efficiency (intake, staffing, resourcing allocation). However, the sector faces potential headwinds such as labor shortages that could push up wages as well as substantial investments needs for digital infrastructure to support telehealth and electronic health records. Regulatory scrutiny, and reimbursement cuts are also looming topics that could further strain margins.

Sales Growth

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Tenet Healthcare grew its sales at a tepid 2.3% compounded annual growth rate. This fell short of our benchmarks, but there are still things to like about Tenet Healthcare.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Tenet Healthcare’s annualized revenue growth of 3.8% over the last two years is above its five-year trend, but we were still disappointed by the results.

We can better understand the company’s revenue dynamics by analyzing its same-store sales, which show how much revenue its established locations generate. Over the last two years, Tenet Healthcare’s same-store sales averaged 2.5% year-on-year growth. This number doesn’t surprise us as it’s in line with its revenue growth.

This quarter, Tenet Healthcare missed Wall Street’s estimates and reported a rather uninspiring 5.7% year-on-year revenue decline, generating $5.07 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 3.1% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and implies its newer products and services will not catalyze better top-line performance yet. At least the company is tracking well in other measures of financial health.

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Operating Margin

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Tenet Healthcare has managed its cost base well over the last five years. It demonstrated solid profitability for a healthcare business, producing an average operating margin of 16.1%.

Looking at the trend in its profitability, Tenet Healthcare’s operating margin rose by 17.5 percentage points over the last five years. The company’s two-year trajectory shows its performance was mostly driven by its recent improvements.

This quarter, Tenet Healthcare generated an operating profit margin of 16.2%, up 2.5 percentage points year on year. This increase was a welcome development, especially since its revenue fell, showing it was recently more efficient because it scaled down its expenses.

Earnings Per Share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Tenet Healthcare’s EPS grew at an astounding 34.7% compounded annual growth rate over the last five years, higher than its 2.3% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Tenet Healthcare’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Tenet Healthcare’s operating margin expanded by 17.5 percentage points over the last five years. On top of that, its share count shrank by 9.3%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q4, Tenet Healthcare reported EPS at $3.44, up from $2.68 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Tenet Healthcare’s full-year EPS of $11.89 to shrink by 6.6%.

Key Takeaways from Tenet Healthcare’s Q4 Results

We were impressed by how significantly Tenet Healthcare blew past analysts’ full-year EPS guidance expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its revenue missed and its full-year revenue guidance fell short of Wall Street’s estimates. Zooming out, we think this was a decent quarter featuring some areas of strength but also some blemishes. The areas below expectations seem to be driving the move, and the stock traded down 1.7% to $136.50 immediately following the results.

Is Tenet Healthcare an attractive investment opportunity at the current price? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.