Will Tenet Healthcare Gain From Tax Reform And Growth Measures?

Tenet Healthcare Corporation THC has provided a mixed impact of the recent tax reform signed by President Donald Trump, which lowers the corporate tax rate to 21% from 35%.

Impact of the Tax Reform

The company has updated its EPS outlook for 2018, substantially down to the range of 5-19 cents (versus previous range of 63-68 cents). Adjusted earning per share is expected in the range of 58-97 cents (versus $1.07-$1.36, earlier). The guidance was lowered, thanks to a reduction in the amount of deductible interest expense for the company.

On a positive note, the tax reform will not affect Tenet Healthcare's ability to utilize the net operating loss (NOL) carry forwards, estimated at approximately $1.6 billion as of Dec 31, 2017. Also, the company will be relieved by $10-$20 million of cash tax payments on account of the repeal of the alternative minimum tax.

The company will also gain from accelerated depreciation, which allows higher deductions in the initial years of an asset's life. This is an important tax incentive that supports a business for purchasing new assets. Tenet Healthcare anticipates almost 80% of capital expenditures to qualify for immediate expensing. However, the sizeable amount of depreciation write off will decelerate the company's ability to utilize NOL carry forwards.

Tenet Healthcare also reiterated 2018 outlook for revenues, adjusted EBITDA and adjusted free cash flow, which were originally provided on Dec 19, 2017. For 2018, net operating revenues are estimated in the range of $17.8 billion-$18.2 billion, while operating cash flow is pegged in the band of $1.245-$1.450 billion for 2018.

Updates on Long-Term Growth Strategies

The company also provided update on the strategic efforts undertaken to improve profitability. Per the company's disclosure, it is on track with divestiture program of non-core markets and assets. It expects to yield in excess of $1 billion of proceeds (over $700 million in cash and approximately $300 million from the elimination of capital leases and related debt).

The sale of Conifer is on table and the company plans to realize $250 million of annualized run-rate savings by the end of 2018. This will trim corporate overhead by 20% and will streamline the company's hospital operations, Conifer and USPI.

The company continues to focus on refreshing its board composition which will provide the company with astute leadership and guidance.
Through the divestiture plan, Tenet Healthcare aims to reduce debt which will ease interest expense and leverage level.  

Will These Efforts Help the Stock?

High leverage, soft market environment, management and board disruption has weighed on the company's price performance which has lost 13% of its value compared with the industry's decline of 0.7%.

However, Tenet Healthcare is likely to recover on the back of growth strategies and we choose to be on the sidelines till the earnings shows the evidence.

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