Tenet Earnings: Improving Medical Utilization and Labor Trends Boost 2023 Outlook Mildly
Tenet Healthcare THC turned in strong first-quarter results, and management raised its 2023 outlook mildly. Our 2023 assumptions were already on the strong end of management’s new guidance ranges, and we do not anticipate materially changing our $95 fair value estimate, which remains well above recent share prices. Also, while our no-moat rating remains, we recognize that Tenet’s operations have improved substantially in recent years, and we expect returns on invested capital to remain above capital costs throughout our five-year forecast period.
In the quarter, Tenet turned in better-than-expected results, helped by improving medical utilization, labor cost trends, and share repurchases. Specifically in the quarter, Tenet generated $5.0 billion in net operating revenue (above previous guidance of $4.7 billion-$4.9 billion), adjusted EBITDA of $832 million (above previous guidance of $750 million to $800 million) and adjusted EPS of $1.42 (above previous guidance of $1.00 to $1.23). Management highlighted several factors that contributed to those strong results. First, medical utilization appears to be improving with high-single-digit growth in same-facility cases at both its ambulatory surgery centers and hospitals, including 14% non-COVID-19 hospital admission growth. Second, contract labor use appeared to peak in September 2022 and continued to decline in early 2023 to 6% of salary, wage, and benefit costs in the first quarter of 2023 versus 7% in the fourth quarter, which could have cost and capacity implications going forward. Also, management said its renegotiations with commercial insurers continued to yield results that better reflect recent inflation trends, as those multiyear agreements expire.
Looking to the future, management only mildly raised its guidance for 2023 to primarily capture its first quarter outperformance and, if current trends continue, we would not be surprised to see additional upticks in guidance through the rest of the year.
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