On Monday, Wells Fargo (NYSE:WFC) issued a rating change for Tenet Healthcare (NYSE:NYSE:THC) stock, moving from an "Overweight" to an "Equal Weight" stance, accompanied by a notable reduction in the price target to $150 from the previous $205. The revision follows a reassessment of the company's future earnings before interest, taxes, depreciation, and amortization (EBITDA) adjusted for non-controlling interests (NCI).
The new price target is based on a lower valuation multiple of 7.75 times the estimated 2026 adjusted EBITDA Less NCI of $3.1 billion, factoring in the company's balance sheet as of December 31, 2025. This multiple represents a slight premium to Tenet Healthcare's historical average multiples over the past three, five, and ten years.
Wells Fargo's decision reflects a belief that while Tenet Healthcare's current multiple is defensible, significant expansion is unlikely without clearer health policy direction. The firm anticipates that the valuation gap between Tenet Healthcare and its peer HCA (NYSE:HCA) could narrow, projecting a smaller difference in the price targets for the two companies.
The downgrade and price target adjustment come amid a period where investors are seeking stability and predictability in the healthcare sector. As such, Wells Fargo's updated position on Tenet Healthcare suggests a more cautious outlook for the company's stock performance in the near term.
In other recent news, Tenet Healthcare has reported a solid financial performance for Q3 2024, with net operating revenues reaching $5.1 billion and an adjusted EBITDA of $978 million, marking a 15% growth from the previous year.
The company also raised its full-year 2024 guidance for adjusted EBITDA to between $3.9 billion and $4 billion, despite a decrease in revenue expectations due to the sale of Alabama hospitals. In the USPI segment, adjusted EBITDA rose by 19% to $439 million, attributed to strong orthopedic procedure performance and new facility openings.
The Hospital segment experienced an 11% increase in adjusted EBITDA at $539 million, with same-store admissions up by 5.2%. Free cash flow for 2024 is projected between $975 million and $1.225 billion, after accounting for significant tax payments related to divestitures. Tenet Healthcare is focusing on portfolio transformation, with capital investments and maintaining a deleveraged balance sheet.
Despite revenue expectations decreasing due to the sale of Alabama hospitals, Tenet Healthcare anticipates $1.975 billion in free cash flow for 2024, excluding tax payments from divestitures. The company is confident in its 2024 performance and ongoing portfolio transformation, with expectations for continued growth and operational efficiencies.
InvestingPro Insights
While Wells Fargo has adjusted its outlook on Tenet Healthcare (NYSE:THC), recent data from InvestingPro provides additional context to the company's financial position. Tenet's P/E ratio stands at a relatively low 4.53, suggesting the stock may be undervalued compared to its earnings. This is further supported by an InvestingPro Tip indicating that the company's valuation implies a strong free cash flow yield.
Despite the downgrade, Tenet Healthcare has shown impressive performance, with a 111.22% price total return over the past year. This aligns with another InvestingPro Tip highlighting the company's high return over the last year. Additionally, the company's revenue for the last twelve months as of Q3 2024 reached $20.97 billion, with a revenue growth of 4.03% over the same period.
It's worth noting that 13 analysts have revised their earnings upwards for the upcoming period, according to InvestingPro Tips. This positive sentiment from analysts could potentially counterbalance Wells Fargo's more cautious stance.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Tenet Healthcare, providing a deeper understanding of the company's financial health and market position.
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