Credit analyst expects more downward revisions from Tenet Healthcare

By Ronda Fears

Nashville, Dec. 4 - Carol Levenson, director of research at Gimme Credit, said she expects more downward revisions from Tenet Healthcare Corp. (Baa3/BBB-) and suggests avoiding the credit.

At the crux of the matter, is the fact that without "outlier" payments from Medicare, earnings growth and EBITDA margins shrink.

"Wisely assuming the sustainability of these payments is at risk, Tenet lowered its current fiscal year earnings growth forecast from 25% to 10%, at the midpoint of the range, followed by an earnings falloff in its 2004 fiscal year of 25%," Levenson said in a report Wednesday.

"Although these numbers were compiled in a highly scientific fashion and are characterized as conservative by management, we wonder whether they're conservative enough.

"Tenet faces no significant debt maturities for several years, but its free cash flow cushion diminishes every time it revises its outlook. Under the new forecast, it will shrink to $850 million in fiscal 2004, down from $1.4 billion last fiscal year.

"We doubt yesterday's downward EBITDA revision will be the last one, and we would continue to avoid this name."

Nobody knows when and how the Medicare might change its policies on outlier payments, but Tenet's plans assume a dramatic reduction in these payments in fiscal 2004 to $150 million in the base case, down from $765 million in fiscal 2002.

Levenson said this could cause Tenet's fiscal 2004 EBITDA to fall by at least $500 million, with cash flow and free cash flow shrinking by roughly $300 million.

She noted that Tenet's earnings model includes no provisions for costs associated with the Medicare change.

Amid this issue, management has asserted that stock buybacks were the best use of free cash flow, while sticking to a 2x debt/EBITDA target.

"This shareholder enhancement pressure is exactly what we've been afraid of from the start of this fiasco," Levenson said.

"We can't emphasize strongly enough the imprudence of squandering cash on stock buybacks, considering the uncertainties facing the company."

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