Tenet Healthcare Corp.'s stock fell 3% Friday after Jefferies downgraded it from buy to hold.
Jefferies raised the stock price target from $28 to $38 per share, which bakes in a healthy valuation for Conifer Health Solutions, Tenet's revenue-cycle management subsidiary that it's shopping around. Shares ended Friday at $33.57.
The sale of Tenet's 76% stake in Conifer will have to net at least $2.5 billion, or about nine-times earnings before income, taxes, depreciation and amortization, to get to that $38 target. Still, that would only incrementally improve the company's debt leverage and it's uncertain whether Tenet would ultimately sell Conifer, analysts said.
According Jefferies, the nearly 130% year-to-date growth in stock price reflects the cost-cutting initiatives put in place by new Executive Chairman and CEO Ronald Rittenmeyer, who replaced Trevor Fetter in October. Tenet has $14.22 billion in long-term debt as of the first quarter of 2018, down from $15.07 billion in the prior-year quarter.
But to continue to grow earnings over the long term, Tenet would need to increase hospital admissions, a tough ask since they have largely been declining across the industry.
Tenet said it does not comment on analyst ratings.
Also down sharply on the day were Community Health Systems, which fell 10.5% to $3.32, and Rennova Health, which June 1 bought a hospital from CHS and was down 9.5% to $0.0019 per share.
Tenet's Conifer unit provides software to hospitals and doctors to help them register patients, authorize their insurance and bill them and payers for care. It serves Tenet's 68 hospitals and more than 700 other hospitals, including some that are managed by Catholic Health Initiatives, which owns a minority stake in Conifer. In 2017, Tenet represented 39% of Conifer's revenue and CHI represented 35%, according to the report.
Conifer's revenue rose by 0.5% in the first quarter of 2018 to $404 million and $98 million in adjusted EBITDA. Rittenmeyer attributed Conifer's improved performance to changes in the company's cost structure focused on cutting unnecessary work.
Selling Conifer is part of Dallas-based Tenet's broader restructuring plan that entails cutting a major swath of its workforce, reorganizing its management structure, divesting hospitals and possibly breaking up business segments.
Tenet reported net income of $191 million in the quarter on revenue of $4.7 billion, up significantly from $36 million on revenue of $4.8 billion in prior-year quarter. Adjusted EBITDA was $665 million, up 26% from $527 million and well ahead of the company's expectations.
Despite lower revenue, Tenet beat its projections around net income attributable to its shareholders in the quarter—$99 million compared with its $70 million projection. Tenet reported a $52 million net loss to shareholders from continuing operations in the first quarter of 2017.
Total hospital admissions inched up by 0.3% in the first quarter of 2018 compared with the prior-year period. Factoring in the hospitals the company has divested since the first quarter of 2017, admissions declined 7.4% during the same period.
Same-store hospital volume growth has only exceeded 2% in two of the past 12 quarters and was negative in four quarters, Jefferies analysts said.