Tenet Healthcare Corp. (NYSE:THC) shares are down more than -12.20% this year and recently decreased -4.30% or -$0.56 to settle at $12.47. Community Health Systems, Inc. (NYSE:CYH), on the other hand, is down -26.83% year to date as of 12/05/2017. It currently trades at $3.93 and has returned -2.39% during the past week.
Tenet Healthcare Corp. (NYSE:THC) and Community Health Systems, Inc. (NYSE:CYH) are the two most active stocks in the Hospitals industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect THC to grow earnings at a 18.63% annual rate over the next 5 years. Comparatively, CYH is expected to grow at a 6.10% annual rate. All else equal, THC’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 8.99% for Community Health Systems, Inc. (CYH). THC’s ROI is 7.40% while CYH has a ROI of -4.70%. The interpretation is that THC’s business generates a higher return on investment than CYH’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. THC’s free cash flow (“FCF”) per share for the trailing twelve months was +1.63. Comparatively, CYH’s free cash flow per share was -0.36. On a percent-of-sales basis, THC’s free cash flow was 0.84% while CYH converted -0.22% of its revenues into cash flow. This means that, for a given level of sales, THC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. THC has a current ratio of 1.30 compared to 2.10 for CYH. This means that CYH can more easily cover its most immediate liabilities over the next twelve months. THC’s debt-to-equity ratio is 620.04 versus a D/E of 11.49 for CYH. THC is therefore the more solvent of the two companies, and has lower financial risk.
THC trades at a forward P/E of 10.51, a P/B of 54.29, and a P/S of 0.07, compared to a P/B of 0.38, and a P/S of 0.03 for CYH. THC is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. THC is currently priced at a -27.16% to its one-year price target of 17.12. Comparatively, CYH is -20.45% relative to its price target of 4.94. This suggests that THC is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.60 for THC and 3.20 for CYH, which implies that analysts are more bullish on the outlook for CYH.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. THC has a beta of 1.19 and CYH’s beta is 1.46. THC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. THC has a short ratio of 8.70 compared to a short interest of 10.02 for CYH. This implies that the market is currently less bearish on the outlook for THC.
Tenet Healthcare Corp. (NYSE:THC) beats Community Health Systems, Inc. (NYSE:CYH) on a total of 8 of the 14 factors compared between the two stocks. THC is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. THC is more undervalued relative to its price target. Finally, THC has better sentiment signals based on short interest.