TENET HEALTHCARE CORP (THC) stock intrinsic value fair value estimate & owner earnings analysis

Tenet Healthcare runs two businesses. Hospital Operations: 50 acute-care and specialty hospitals in eight states (Texas, Florida, California, Arizona, Michigan, Massachusetts, Tennessee and South Carolina), 132 outpatient centers, a physician network, and Conifer, a revenue-cycle services business. Ambulatory Care: USPI, which at the end of 2025 held stakes in 533 surgery centers and 26 surgical hospitals in 37 states. Most of these are joint ventures with local physicians or health systems. In 2025 hospitals produced $16.1 billion of the $21.3 billion in revenue. Ambulatory Care produced $5.2 billion of revenue but earned about four-fifths as much as the hospitals before overhead ($2.0 billion vs. $2.5 billion of segment profit), and that mix shift is the main story of the last five years. How we measure earnings. We start from operating cash flow and remove working-capital swings, stock compensation and the capital spending needed to keep the facilities running. Three accounting judgements matter. (1) In 2020-2022 operating cash flow swung with pandemic Medicare advances that were received and then repaid. We strip those out as working capital. (2) In 2024 Tenet paid $855 million of income tax on the gain from selling a group of hospitals. That tax belongs with the sale proceeds, not with running the business, so we exclude it when judging normal earnings. 2025 needs no such adjustment. (3) Tenet consolidates partly owned surgery centers, so its cash flow includes cash that belongs to its partners. We deduct what it actually pays them ($809 million in 2025, $681 million in 2024, $594 million in 2023). Before interest and after partners, the business produced about $1.83 billion in 2023, $1.94 billion in 2024 (excluding the divestiture tax) and $2.37 billion in 2025. We set the normal level at the $1.94 billion median of those three years, which describe the business after the hospital sales and the shift toward surgery centers. Earlier years include pandemic distortions and a larger, lower-margin hospital portfolio. The 2025 figure is not used as the base because part of it rests on conditions now reversing, described below. What changes from here, all of it already disclosed. (a) CommonSpirit Health. In January 2026 Tenet agreed with CommonSpirit to end Conifer's revenue-cycle contract with CommonSpirit facilities on December 31, 2026, six years before its 2032 end date. CommonSpirit will pay $1.9 billion over three years. $540 million of that was settled by offset against Conifer buying back CommonSpirit's 23.8% stake, so Tenet now owns all of Conifer. The roughly $1.36 billion still to come is counted as a financial asset below. Tenet has been booking a gain on the termination ($413 million in each of the first two quarters of 2026, $826 million in total). That gain is a one-off and is excluded from earning power. From 2027 Conifer loses the contract's profit but no longer shares Conifer's earnings with a partner. (b) Medicaid supplemental payments. These rose from $929 million in 2023 to $1.161 billion in 2024 and $1.338 billion in 2025, and they are nearly pure profit. The One Big Beautiful Bill Act caps state-directed payments and limits provider taxes, with the most consequential provisions starting in 2027. (c) Coverage. The enhanced Affordable Care Act premium tax credits expired at the end of 2025. Tenet says this is reducing enrollment and is expected to raise uninsured care from 2026. The Act's Medicaid work requirements and eligibility checks follow from 2027. Base case (median). Business cash flow of about $2.1 billion in the first year. That is below the $2.37 billion actually earned in 2025, a year in which cash flow grew about 22%, to allow for the tax-credit loss. First-half 2026 operating cash flow ($2.23 billion vs. $1.75 billion a year earlier) shows no sign of a collapse. From 2027 we deduct about $75 million a year for the CommonSpirit contract net of the partner share no longer paid, and about $100 million a year for coverage losses. Supplemental payments fall back to roughly their 2023 level in steps over 2028-2031, costing about $310 million a year after tax. The only growth credited is about 3% a year on the surgery-center slice, below the 7.5% same-facility revenue growth USPI reported for 2025 (driven mainly by price and acuity, with cases up 0.3%). Hospitals are held flat. We credit no new acquisitions, new markets or margin gains. Cash flow dips to about $1.76 billion in year six and recovers to about $1.9 billion by year ten. After that it is held flat, because hospital licenses, trauma and tertiary programs and a surgery-center network with physician partners are durable, but we don't assume they grow. Discounted at 6%, the business is worth about $31.6 billion. It owes $13.25 billion of borrowings including finance leases (June 30, 2026), offset by about $1.67 billion of surplus cash (we keep $500 million for operations) and about $1.27 billion, in today's money, of remaining CommonSpirit installments, for net debt of about $10.3 billion. That leaves about $21.3 billion for shareholders, or roughly $263 per share on about 81 million diluted shares. Bear case (10th percentile). First-year cash flow of $1.95 billion. Supplemental payments are cut by about $560 million a year after tax as the caps bite fully. Coverage losses reach $250 million a year. The CommonSpirit loss is $130 million a year. Hospital margins erode 1% a year from the wage and supply inflation the company describes. Surgery centers grow only 1%. Cash flow falls to about $1.0 billion. After year ten it shrinks 2% a year as care keeps moving out of hospitals. Business value is about $16.3 billion against about $10.8 billion of net debt. That includes about $0.5 billion of extra cost for refinancing the 2027-2030 maturities ($1.6 billion, $2.4 billion, $1.4 billion and $3.5 billion) at higher rates, because interest of about $0.85 billion a year would then take most of the cash flow. That leaves about $68 per share. The company still covers its interest in this case, but with little room to spare. Bull case (90th percentile). First-year cash flow of $2.3 billion, close to 2025. Supplemental payments lose only about $140 million a year after tax. The CommonSpirit loss is about $40 million a year. Surgery centers grow 6% a year, near their recent same-facility pace. Business value is about $43.5 billion, minus $10.3 billion of net debt, or about $410 per share. Debt. All notes carry fixed coupons between 4.25% and 6.875%, and maturities are spread from November 2027 to 2033. The blended cost is close to our 6% rate, so no adjustment is made except in the bear case. Changes since our previous analysis. We previously put the shares at $22 / $225 / $458. That analysis treated 2025 cash flow as flattered by a one-time tax-timing benefit. The filing shows the one-off was the $855 million divestiture tax that depressed 2024, so 2025 was not inflated. Our new figures also take in the CommonSpirit agreement, the Medicaid supplemental-payment caps and the payments to outside partners. They no longer use a higher discount rate for risk; risk is carried in the cases instead. The bear case rises because 2025 cash flow was real. The bull case falls because supplemental payments and the CommonSpirit contract can no longer be assumed to last. What would make this wrong. Earnings depend on government reimbursement for Medicaid and the exchanges and on how individual states carry out the 2025 law, which Tenet says it cannot predict. Supplemental payments that fall faster or further than in the bear case, or a sharper rise in uninsured patients in Texas and Florida, would push value below our range. A sustained run of surgery-center growth at the 2025 pace would push it toward the bull case. Margin-of-safety price. A 20% annual return needs a wide margin here. The range runs from $68 to $410, it hinges on policy decisions not yet made, and the company carries over $10 billion of net debt. The margin-of-safety price is $135, roughly half the base value; from that price, a return to base value within about three and a half to four years implies about 20% a year. The bear case would still imply a heavy loss, which is why the margin-of-safety price is set no higher.