If you were smart enough to have bought shares in Tenet Healthcare (NYSE: THC) in February 2009, pat yourself on the back. The Dallas-based health care services company has rewarded you with a nifty gain of more than 500% since that time.
Those who bought their shares 10 years ago and have held on, however, are much less fortunate. They have the dubious distinction of owning stock in a company that was recently named one of the 20 worst performers of the past decade. How bad was the damage? A 10-year annualized return of -13.8% vs. a 7% gain for the Fortune 500.
Tenet shares have recently retreated from their 52-week high of $7.70 after rejecting a third and final all-cash takeover bid from rival Community Health Systems (NYSE:CHS) for $7.25 a share. Adding insult to injury, Tenet also sued Community Health for an undisclosed amount, alleging the Tennessee-based hospital company purposely admitted patients for financial rather than medical purposes and overcharged Medicare.
Unfortunately, that’s an issue with which Tenet is all too familiar. In 2002, the company was accused of inflating sales by over-collecting payments from Medicare. Even though the federal government didn’t prove Tenet had committed a crime, the company eventually forked over $725 million to the Justice Department.
More bad news followed shortly. Two of Tenet’s doctors were accused of doing a number of unnecessary heart surgeries, resulting in yet another costly settlement. Not surprisingly, the shares were battered, dropping steadily from a high of nearly $50 in May 2002.
With those transgressions now in the rear-view mirror, is now a good time to jump on the Tenet bandwagon? Not necessarily. Many industry observers believe Tenet should have taken the Community Health offer and got out while the getting is good. Naturally, Tenet management disagrees.
President and CEO Trevor Fetter said the Community Health offer was inadequate given the company’s current financial position, its 2011 outlook and growth prospects. “As we outlined in our earnings announcement… we are delivering strong performance in virtually every aspect of our business – our volume trends are improving and pricing and cost trends continue to be favorable, he added.”
During the first quarter, the company’s revenue grew faster than expected as admissions and outpatient visits increased. At the same time, Tenet’s profit fell 16% due to an increased income tax expense. Based on its strong start, the company raised its 2011 outlook for pretax earnings. This optimistic view, along with the company’s puny price-to-earnings ratio of just more than 3 may encourage some investors to jump in.
Yet Tenet and other of its hospital brethren still have to address the 2,000 pound gorilla in the closet: the recent report showing that Medicare will run out of money by 2024, a full five years earlier than projected just a year earlier. That could be a serious problem for Tenet, which derives 24% of its revenue from Medicare.
Others in the same boat include HCA (NYSE:HCA) at 31% and Universal Health Services (NYSE:UHS), which gets between 18% and 27% of its revenue from Medicare.
Until the government finds a way to keep Medicare solvent well beyond projections, investors might want to proceed with caution on these stocks.
