Tenet Healthcare

Tenet reported second-quarter results that included 7% revenue growth, 16% growth in adjusted EBITDA, and 52% adjusted EPS growth to $6.12 (above FactSet consensus of $4.26). Management also increased its 2026 outlook.

Why it matters: Shares jumped nearly 20% in intraday trading on these strong results and stronger view for the year, which was in stark contrast to HCA lowering its outlook on July 14 on higher headwinds from the individual exchanges than previously anticipated. Given the declining insured population and the potential for rising uncompensated care costs through emergency rooms, we were surprised that the hospital operations (22% adjusted EBITDA growth) rather than the ambulatory services division (9%) led the way on profit growth. The company cited strong revenue growth, cost controls, and higher Medicaid supplemental payments as the key drivers of the hospital segment's strength, which helped the firm boost its 2026 adjusted EPS outlook to $20.30-$21.69, which was about 20% above its previous range of $16.38-$18.68 and significantly above our prior view.

The bottom line: We are raising our fair value estimate for narrow-moat Tenet to $285 per share from $240, mostly due to stronger near-term expectations and recent cash flows. Shares may still trade in moderately undervalued territory after this similar fair value and share movement. Of note though, over our explicit 10-year forecast period, we attempt to balance expected growth in demand for caregiving services with growing regulatory headwinds on profits because we think profit growth may eventually pull back due to upcoming headwinds. Those headwinds include a rising uninsured rate, as new policies cut into individual exchange enrollment in 2026 and cut into Medicaid starting in 2027, which may increase uncompensated care costs at hospitals. Also, supplemental payments from states may decrease starting in 2028.

Because Tenet's near-term outlook is better, with about 20% higher earnings per share expected in 2026, and its recent cash flows are good, we're raising our fair value estimate from $240 to $285 per share.

Through 2030, we assume Tenet's operational revenue grows at about 4% compounded annually, slightly deflated by divestitures and a strong base year in 2025. On an adjusted EBITDA basis, we expect similar growth as revenue, but given the firm's rising focus on share repurchases, we think adjusted EPS could grow at an even faster pace. We currently expect high-single-digit adjusted EPS growth compounded annually through 2030.

However, investors should know that Tenet may eventually face higher uncompensated care rates in its hospitals if the insured rate rises as projected in the US through 2027, which could constrain the firm's margins. Specifically, we have built in headwinds that could constrain profitability, including lower enrollment in the individual exchanges (2026) and Medicaid (2027), as well as lower direct payments to providers such as Tenet (2028). Even with those headwinds, we think Tenet's earnings growth trajectory will remain positive overall from 2025 to 2030, although decelerating from the heady days in 2024-25, which have represented a substantial rebound since the covid pandemic years of 2020-23, when lower medical utilization and higher labor costs hurt Tenet's profits.

In March 2025, we upgraded our economic moat rating for Tenet to narrow from none previously. Quantitatively, Tenet’s economic profits look likely to remain above capital costs for our explicit 10-year forecast period. We see advantages in both its hospital operations, where it generates operating margins in the top quartile of all hospitals in the US, and in its ambulatory surgery business, where it operates with even stronger margins and growth prospects than its hospital operations. Additionally, after deleveraging from over 5 times net debt/EBITDA prior to the pandemic to less than 3 times in mid-2025, we view its current financial leverage as much more manageable than our previous concerns that resulted from a prior management team’s actions.

We think Tenet primarily depends on intangible assets to generate economic profits, but elements of cost advantage are also present, especially in its ambulatory surgery business.

Intangible Assets:

Tenet uses its reputation for quality services, extensive physician relationships in its chosen communities, and convenient and efficient locations to attract demand for its services and get paid well for them, which we view as intangible asset-related advantages.

For example, the company aims to equip all of its facilities with state-of-the-art technology to help doctors perform surgical procedures and other care. Staying up to date with medical technology trends can help attract physicians to Tenet's facilities.

Tenet is also increasingly using analytics to spread best practices in terms of quality and efficiency across its network of facilities, which should help attract referrals from community physicians who are concerned about their patients receiving the proper care. Also, these operating efficiencies should help Tenet generate economic profits.

Specifically, within its ambulatory surgery business, physician relationships are especially important and we think the ownership interest that its surgeon partners have in those outpatient facilities (typically 40% to 49.9%) influences each surgeon’s use of Tenet’s facilities as each surgeon directly prospers financially when related facility profits rise.

Following portfolio pruning, Tenet is expanding in fast-growing end markets, enabling it to demand strong reimbursement rates from insurers at its remaining facilities, whether inpatient or outpatient. On an inpatient basis, we think insurers in most of Tenet’s local markets would have a significant incentive to include the organization in their provider networks at reasonable reimbursement rates, which helps Tenet generate economic profits. The company also takes a unique approach to contracting with nationwide insurers at its outpatient facilities, requiring them to consider Tenet’s significant national volume across its network of facilities when setting reimbursement rates, rather than relying solely on the local share. This has resulted in strong negotiated rates at those outpatient facilities, which help the company generate economic profits in its outpatient business.

Outpatient Facility Cost Advantages:

We also see evidence of cost advantages in its outpatient facilities, although we do not see cost advantage as a companywide moat source just yet. Positively, the use of outpatient surgical facilities can benefit third-party payers in the US healthcare system because outpatient facilities usually charge 30% to 50% less for the same procedure than a comparable acute hospital would charge. Those lower costs give payers incentives to drive more volume through outpatient facilities like the ones Tenet operates.

Also, outpatient service providers typically enjoy much better cost structures and margins than their acute hospital peers, which bodes well for Tenet since a big and fast-growing part of its profits is derived from its outpatient surgery business. In Tenet’s case, its ambulatory care business enjoys operating margins after noncontrolling interest payments to surgeon partners that are about double its own hospital segment margins primarily because of the overhead cost differences. We suspect growth in ambulatory surgical facilities should also continue to rise at a fast pace, primarily because of the lower costs per procedure that can be charged by outpatient facilities than hospitals for similar care. This bodes well for Tenet’s economic profit generation for the foreseeable future.

With new management at the helm since late 2017, Tenet has become a more efficient and profitable organization, which shows how the team has made progress operationally.

As the top provider of ambulatory care services in the US, Tenet should be able to continue benefiting from the ongoing shift of procedures to outpatient facilities from acute-care hospitals, which should boost Tenet's revenue growth and overall margins.

Tenet continues to focus on improving its balance sheet, and more of its enterprise value should fall to shareholders than debtholders in the future.

Tenet has often operated with high financial leverage that can add both fixed costs and some refinancing risk to the organization.

External shocks can hit volume and mix in Tenet's healthcare facilities, and in negative economic events, the government may not lend as much support to the hospital system as it did during the pandemic.

Upcoming regulatory headwinds could affect its profitability, including the potential for lower enrollment in the individual exchanges (2026) and Medicaid (2027), which could lead to more uncompensated care, and lower direct payments to providers (2028).