Tenet Healthcare (THC)

Hospital operator Tenet Healthcare (NYSE:THC) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, but sales fell by 2.7% year on year to $5.22 billion. The company expects the full year’s revenue to be around $20.8 billion, close to analysts’ estimates. Its non-GAAP profit of $4.36 per share was 39.2% above analysts’ consensus estimates.

Company Overview

With a network spanning nine states and serving primarily urban and suburban communities, Tenet Healthcare (NYSE:THC) operates a nationwide network of hospitals, ambulatory surgery centers, and outpatient facilities providing acute care and specialty healthcare services.

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.

Tenet Healthcare's main competitors include HCA Healthcare (NYSE:HCA), Community Health Systems (NYSE:CYH), Universal Health Services (NYSE:UHS), and Surgery Partners (NASDAQ:SGRY) in the hospital and ambulatory surgery center space.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $20.52 billion in revenue over the past 12 months, Tenet Healthcare has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

A company’s long-term performance is an indicator of its overall 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 2.1% compounded annual growth rate. This wasn’t a great result, 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 2.7% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

Tenet Healthcare also reports same-store sales, which show how much revenue its established locations generate. Over the last two years, Tenet Healthcare’s same-store sales averaged 2.1% year-on-year growth. This number doesn’t surprise us as it’s in line with its revenue growth.

This quarter, Tenet Healthcare’s revenue fell by 2.7% year on year to $5.22 billion but beat Wall Street’s estimates by 1.3%.

Looking ahead, sell-side analysts expect revenue to grow 2.7% over the next 12 months, similar to its two-year rate. This projection is underwhelming and indicates 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.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D.

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 16.6%.

Looking at the trend in its profitability, Tenet Healthcare’s operating margin rose by 5.4 percentage points over the last five years, as its sales growth gave it operating leverage. 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 18.1%, down 43.1 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

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 30.7% compounded annual growth rate over the last five years, higher than its 2.1% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Tenet Healthcare’s earnings to better understand the drivers of its performance. As we mentioned earlier, Tenet Healthcare’s operating margin declined this quarter but expanded by 5.4 percentage points over the last five years. Its share count also shrank by 10.1%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, Tenet Healthcare reported EPS at $4.36, up from $3.22 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 $13.03 to shrink by 5.4%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Tenet Healthcare has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.7% over the last five years, slightly better than the broader healthcare sector.

Taking a step back, we can see that Tenet Healthcare’s margin dropped by 11.7 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Tenet Healthcare’s free cash flow clocked in at $642 million in Q1, equivalent to a 12.3% margin. This result was good as its margin was 5.8 percentage points higher than in the same quarter last year. Its cash profitability was also above its five-year level, and we hope the company can build on this trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Tenet Healthcare’s five-year average ROIC was 21.3%, beating other healthcare companies by a wide margin. This illustrates its management team’s ability to invest in attractive growth opportunities and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Tenet Healthcare’s ROIC has increased significantly. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

Tenet Healthcare reported $3.00 billion of cash and $13.17 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $4.13 billion of EBITDA over the last 12 months, we view Tenet Healthcare’s 2.5× net-debt-to-EBITDA ratio as safe. We also see its $404 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Tenet Healthcare blew past analysts’ EPS expectations this quarter on a solid revenue beat. We were also glad its full-year EPS guidance outperformed Wall Street’s estimates. On the other hand, its full-year revenue guidance was just in line. Overall, this quarter was still solid. The stock traded up 1.8% to $126.01 immediately after reporting.

Updated: May 21, 2025 at 11:53 PM EDT

Before investing in or passing on Tenet Healthcare, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

There are things to like about Tenet Healthcare. Although its revenue growth was uninspiring over the last five years, its astounding EPS growth over the last five years shows its profits are trickling down to shareholders. And while its cash profitability fell over the last five years, its rising returns show management's prior bets are paying off.

Tenet Healthcare’s P/E ratio based on the next 12 months is 13.2x. Looking at the healthcare landscape right now, Tenet Healthcare trades at a pretty interesting price. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $175.24 on the company (compared to the current share price of $162.83), implying they see 7.6% upside in buying Tenet Healthcare in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.