Tenet Healthcare's (THC - Get Report) $725 million sale of three Houston hospitals to HCA Holdings (HCA - Get Report) is one of several major moves the company announced Tuesday that helped push the struggling hospital operators' shares up nearly 23% through mid-day trading.
Besides the sale of the Houston hospitals, Tenet reported a new agreement for company physicians to rejoin Humana's (HUM - Get Report) provider network, completed the sale of the majority of its home health and hospice businesses, sold its managed Medicaid plan in Arizona and increased its ownership of ambulatory surgery center operator United Surgical Partners International to 80%.
Jeffries analyst Brian Tanquilut wrote that the bundle of the news "provided investors positive news on several key fronts that should help the stock bounce off current levels."
For starters, Ebitda coming in a the high end of guidance could only boost the shares, given that "investors' Q1 expectations were at trough levels."
The shares closed at $18.66, up $3.31 or 21.56% Tuesday.
Despite the positive news, Tanquilut said Tenet's long-term stock performance is still dependent on meaningful free cash flow and balance sheet improvement.
Tenet reported a net loss from continuing operations of $52 million in the first quarter of 2017, a $3 million improvement when compared to a $55 million net loss from continuing operations in the first quarter of 2016. Adjusted Ebitda was $527 million in the first quarter of 2017, down from $617 million in the first quarter of 2016.
During the company's earnings call with analysts Trevor Fetter, Tenet Chairman and CEO, said the agreement with Humana, the additional interest in USPI and the sale to HCA all "are tangible evidence" of Tenet's commitment "to increasing growth in earnings and margins and decreasing leverage and complexity."
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A key trouble spot for the company Fetter said, is the "soft volume environment" for hospital admissions but he noted that company was able to deliver its overall Ebitda results due to the hospitals' "strict cost control in the face of weak volumes."He predicted the volume weakness would be temporary and said, "we have strategies and initiatives in place that make it possible for us to meet our expectations for volumes for the year." These include service line investments across Tenet's network and the expansion of access points in communities it serves.
He noted that the loss of network status with Humana, which has hit volume in 2017 results will be rectified in 2018. "The new three-year agreement includes all of our hospitals, outpatient centers, and employed physicians which will become in network providers with Humana during a phased-in process beginning June 1." The reintegration into Humana's network is expected to be complete by October 1.
"Our strategy at Tenet has always been to maintain collaborative relationships to commercial customers and to be in as many networks as possible to ensure access to our facilities," he said.
Fetter said Tenet may go out of network "from time to time" if acceptable agreements with a particular insurer can't be reached but the recent situation with Humana "was very unusual."
Jeffries' Tanquilut said the hospital sale was "a positive surprise."
The hospitals sold are the 423-bed Houston Northwest Medical Center, 181-bed Cypress Fairbanks Medical Center Hospital and 444-bed Park Plaza Hospital.
"The divestiture aligns nicely with a pair of THC's strategic goals," Tanquilut said, including reducing exposure to geographies where it has limited market share and increasing ownership in the more higher margin, less CapEx-intensive USPI business.