“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
TENET HEALTHCARE CORP. $21(New York symbol THC; Consumer Sector; Shares outstanding: 103.4 million; Market cap: $2.2 billion; No dividend paid; Takeover Target Rating: Highest; www.tenethealth.com) is one of the largest for-profit hospital chains in the U.S. It operates 65 hospitals and 500 other health-care facilities. Those include surgical hospitals, ambulatory surgery centres, urgent care and imaging centres, and other outpatient facilities.
The company took its current form on March 1, 1995, with National Medical Enterprises’ purchase of American Medical Holdings for $1.5 billion cash and 33.2 million shares of common stock.
Patients with private insurance plans accounted for 65% of Tenet’s revenue in 2018, followed by Medicare/Medicaid plans (30%) and those without insurance (5%).
Thanks in part to acquisitions, revenue rose 18.1%, from $16.62 billion in 2014 to $19.62 billion in 2016. Revenue fell 2.3%, to $19.18 billion in 2017, and 4.5% to $18.31 billion in 2018. The declines reflect the sale of some the company’s hospitals.
Earnings have been more erratic. They jumped from $1.44 a share (or a total of $144.3 million) in 2014 to $2.06 a share (or $204.0 million) in 2015. They then fell to $1.05 a share (or $104.0 million) in 2016 before falling again in 2017 to $0.79 a share (or $79.0 million). Earnings rebounded to $1.86 a share (or $193.0 million) in 2018.
In the three months ended June 30, 2019, Tenet’s overall revenue rose 1.2%, to $4.56 billion from $4.51 billion a year earlier. That gain was due to higher hospital admissions and surgical procedures.
Excluding one-time items, the company made $59.0 million, or $0.56 a share. That was up 15.7% from $51.0 million, or $0.49 a year earlier.
As of June 30, 2019, Tenet’s long-term debt was $14.3 billion, or a very high 7.2 times its market cap. It also held cash of $249 million.
In December 2017, the company launched an auction for its Conifer Health Solutions business, which handles patient payments for health-care providers. However, it failed to win an acceptable offer. As a result, it now plans to set up Conifer as independent company.
Conifer helps health-care providers manage their patient billing process by effectively utilizing the latest technology. In 2018, that business had more than 800 clients, and managed 17 million unique patient interactions and more than $25 billion in net patient revenue. Conifer had $1.54 billion in revenue in 2018 (8% of Tenet’s total revenue).
Common Spirit, the non-profit hospital system that owns about 24% of Conifer, supports the spinoff plan. Common Spirit was formed earlier this year by the merger of Catholic Health Initiatives and Dignity Health.
To provide Conifer with an appropriate capital structure as an independent company, Tenet will delay the spinoff until the second quarter of 2021. Complicating the process, Conifer’s CEO resigned at the same time Tenet announced the conclusion of its strategic review. Conifer’s chief operating officer will be interim CEO until a permanent replacement is found.
Tenet trades at a low 9.1 times the $2.30 a share it will likely earn in 2019. That low p/e reflects several challenges, including the possibility of a “Medicare for all” system that could hurt the long-term profitability of all privately owned hospital chains.
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