Tenet Healthcare Corporation (NYSE:THC) is one of the nation’s largest for-profit hospital management companies. Revenue is expected to be up 3.8% in 2012 and 4.5% in 2013 as the hospital operator continues to operate well amidst a tough economic backdrop. Despite the uncertainty over healthcare reform and reimbursement rates, Tenet is up over 35% year to date. We still see value in the healthcare company and would consider it a good investment given its industry-low 10x forward P/E and PEG ratio of 1.1.
Glenview Capital recently took an +10% stake in Tenet (here is the hedge fund’s top 30 stock picks), and other notable investors at the end of 3Q included Healthcor Management and Adage Capital, both taking new positions in the stock.
Universal Health Services, Inc. (NYSE:UHS) is expected to generate sales growth of 6.3% in 2013, compared to the expected 2012 sales growth of 1.3%. Growth will be driven in part by the acquisition of Ascend Health Corp, which is expected to add $200 million to sales in full. Universal has been working toward a more diverse revenue stream, one that now includes acute care services and behavioral services.
Universal saw notable billionaire Ken Fisher (see Fisher’s full portfolio here) increase his 2Q stake by almost 50% and other notable fund First Eagle Investment take a new position in 3Q. Worth saying is that as Healthcor was upping its Tenet stake, the firm downsized its Universal stake by almost 75%.
Community Health Systems (NYSE:CYH) is expected to continue its strong growth from 2012 (up 6%) into 2013 (up 5.1%). This growth should be driven by acquisitions with Community targeting 4-5 purchases by the end of next year. Now, it’s obvious that acquisitions of underperforming hospitals will put near term pressure on margins, but Community shares’ strong price performance—up 60% year to date—shows that investors are confident that margins will stabilize over the longer term. The healthcare facility operator still only trades at 11x earnings and 7.4x forward earnings, possibly representing a value play for investors.
Glenview Capital has also been active in Community Health, recently buying 8.4% the company. Other top investors and top shareowners of Community Health at the end of 3Q were AQR Capital and D.E. Shaw. AQR increased its 2Q stake 23% and Shaw increase his by 39%.
HCA Holdings Inc (NYSE:HCA) is expected to see revenue growth of 10% in 2012 and then 6% in 2013, and driving this growth has been the 2011 buyout of its 40% non-owned stake of HealthOne. HCA’s long-term investment plans include increasing emergency room capacity to allow for better utilization. While HCA’s 4.5x trailing P/E appears enticing, the fact that its forward P/E is 8.5x leaves room for concern. Even so, with HCA expected to grow EPS at over 11% annually for the next five years, the healthcare company has attracted various fund interest.
Top fund owner at the end of 3Q was Glenview Capital with over 8.4 million shares, a 31% increase in shares from 2Q, now making up 4.5% of Glenview’s 13F portfolio. Other top owners were John Paulson and First Eagle Investment.
Health Management Associates, Inc. (NYSE:HMA) focuses on rural markets and small cities with limited competition. Health Management is expected to end 2012 with 15% revenue growth, but only post 5% growth in 2013. The 2011 acquisition of Mercy Health Partners, which had annual revenues around $600, should help drive this growth. Even with the highest P/E of our five hospital stocks at 13x, Health Management still offers solid value to investors with a forward P/E of only 8.7x.
Glenview Capital made its presence known in Health Management as well, owning over 25 million shares at the end of 3Q, making up 3.5% of their 13F. The other fund interest was minimal compared to Glenview, with Carlson Capital and D.E. Shaw each owning over 1.7 million shares each.
Comparing the hospital companies on a valuation basis, we find that Tenet Healthcare trades with an incalculable P/E and HCA has the lowest with a 4x P/E. The other healthcare facility companies trade in a tight range: Community (11x), Health Management (14x) and Universal Health (11x). We like Universal Health as an investment opportunity given its low beta of 1.2 and low long-term debt to capital ratio of 59% when compared to the others. Glenview has given a large vote of confidence to Tenet, which was the fund’s second largest 13F holding as of 3Q. We would consider Tenet and Community Health as solid investments as well.
