Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Highest Dividend Yields Among Undervalued Enterprising Companies.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Tenet Healthcare Corp (THC)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Tenet Healthcare Corporation (Tenet), along with its subsidiaries, is an investor-owned health care services company. Tenet operates 77 acute care hospitals, 173 outpatient centers, five health plans and six accountable care organizations. As of October 7, 2013, the Companyâ€™s new hospital was under construction in New Braunfels, Texas. In addition, the Company includes Conifer Health Solutions, which provides health business process solutions at 15 service centers serving 600 clients across 43 states. The Company operates in two segments: hospital operations and other, and Conifer. In May 2012, the Company sold Diagnostic Imaging Services, Inc., its former diagnostic imaging center business in Louisiana. In August 2012, the Company sold its Creighton University Medical Center in Nebraska. In October 2013, Tenet Healthcare Corporation completed its acquisition of Vanguard Health Systems, Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 1/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 0/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$14.01|
|Value Based on 0% Growth||$8.21|
|Market Implied Growth Rate||19.46%|
|Net Current Asset Value (NCAV)||-$120.70|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Tenet Healthcare does not qualify for either the Defensive Investor or the Enterprising Investor. Â In fact, the only requirement of either investor type which the company passes is the Defensive Investor’s requirement regarding market cap. Â As a result, all value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through theÂ ModernGraham Valuation Index.Â Â From a valuation perspective, the company appears to be overvalued, after seeing its EPSmg (normalized earnings) fall from $2.70 in 2010 to an estimated $0.97 for 2014. Â This demonstrated drop in earnings clearly does not support the market’s implied estimate of 19.46% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well below the market price at this time.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Tenet Healthcare Corp (THC)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in any company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.