Jefferies Likes Tenet After Corporate Reshaping, Sees CVS Benefiting From Vaccine Rollout
Jefferies analysts turned bullish on two names in the health care group, Tenet Healthcare Corp. (NYSE: THC) and CVS Health Corp. (NYSE: CVS)
The Analyst: Brian Tanquilut upgraded Tenet's stock from Hold to Buy with a price target lifted from $27 to $60. The analyst also upgraded CVS from Hold to Buy with a price target lifted from $66 to $90.
The Tenet Thesis: Tenet's management deserves credit for two recent changes to the business structure that represent "transformational catalysts," Tanquilut wrote in the upgrade note. First, the company's spin-off of Conifer will unlock its underlying value and justify a higher valuation.
Current estimates value Conifer at just 12 times EBITDA and this represents a notable discount to its closest comparable, R1 RCM Inc. (NASDAQ: RCM) which trades at 18 times EBITDA.
"Our view is that companies with multiple business lines — even those with segments that have vastly different growth and fundamental characteristics — generally do not get credit for theoretical sum-of-the-parts (SOTP) valuations until a strategic or governance catalyst emerges," the analyst wrote.
Second, Tenet's acquisition of up to 45 ambulatory surgery centers (ASCs) from SurgCenter Development adds a high growth and strong cash flow business to Tenet's portfolio, the analyst wrote. The earnings contribution from the acquisition will grow as a percentage of total earnings and should command a higher valuation as management delivers on its $40 million to $50 million in synergies projection.
The two changes should result in investors no longer looking at Tenet as a "levered hospital play," the analyst wrote. Instead, around half of the new entity consists of a high growth and high multiple business segment.
Related Link: Benzinga's Top Upgrades, Downgrades For January 8, 2021
The CVS Thesis: CVS stands to benefit from the COVID-19 vaccine rollout as pharmacies will be tasked with playing a role in the vaccination strategy, Tanquilut wrote in the upgrade note. CVS holds an approximate 25% market share in the pharmacy space and could generate an incremental $1 billion in gross profits over the next year from increased store traffic.
CVS' stock at current levels does not factor in the vaccine tailwind as there is still a lack of clarity in terms of the exact timing and duration of the vaccination effort.
"We believe earnings expectations and CVS shares have little benefit baked in from COVID vaccination, so we see likely earnings upside surprises over the next few quarters from this driver, that we believe will translate to meaningful stock upside," the analyst wrote.
Price Action: Shares of Tenet were trading higher by 3% Friday at $45.65; shares of CVS were higher by 1.2% at $74.92.
Latest Ratings for THC
Jan 2021 | Jefferies | Upgrades | Hold | Buy |
Jan 2021 | B of A Securities | Upgrades | Neutral | Buy |
Dec 2020 | Credit Suisse | Maintains | Outperform |
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