Appaloosa Management is a hedge fund founded in 1993 by David Tepper and Jack Walton. It’s based in Short Hills, New Jersey. Appaloosa Management invests in public equity and fixed-income markets around the world. It has about $20 billion in assets under management.
Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).
In this six-part series, we’ll go through some of the main positions Appaloosa Management traded this past quarter.
Appaloosa started new positions in Freeport-McMoRan Copper & Gold (FCX), Ingredion Inc. (INGR), Community Health Systems Inc. (CYH), and Tenet Healthcare Corp. (THC) and it sold Comcast Corp. (CMCSA) and Microsoft (MSFT).
Why buy Tenet Healthcare Corp. (THC)?
Tenet Healthcare reported an 8.4% increase in net operating revenues to $2.408 billion in 3Q 2013 compared to net operating revenues of $2.221 billion in 3Q 2012. Adjusted EBITDA increased 7.1% to $288 million. It delivered strong growth in outpatient visits, emergency department volumes, and total surgeries in the quarter. In addition, its Conifer services business saw a 50% increase in EBITDA compared to last year’s third quarter. Conifer recorded revenues of $225 million, an increase of 84%. The growth in both revenues and adjusted EBITDA reflects the favorable impact of acquired businesses, the integration of Catholic Health Initiatives (CHI), revenue cycle operations, and organic growth.
On October 1, Tenet Healthcare completed the $4.3 billion acquisition of Vanguard Health Systems, which further strengthens its competitive position for future growth. With the acquisition, Tenet acquired 28 hospitals (plus one more under development), 39 outpatient centers, and five health plans with approximately 150,000 members. Net operating revenues in the third quarter of 2013 included $19 million of revenues from the California Provider Fee program, a $6 million increase compared to the third quarter of 2012. The California legislature has approved and the governor has signed a 36-month extension to the California Provider Fee program effective January 1, 2014. The renewal also includes a framework to extend the program for at least three years beyond 2016. Based on preliminary estimates, Tenet expects to recognize approximately $475 million of net revenues under this program over the three-year period ending December 31, 2016. It expects to recognize approximately $115 million of California Provider Fee revenues in calendar year 2013.
The company’s adjusted EBITDA outlook range for 4Q 2013 is $400 million to $450 million. This outlook reflects assumptions for continuing soft inpatient volume growth and a less attractive payer mix. The outlook assumes minimal financial synergies related to the Vanguard acquisition are captured in 4Q 2013. The company added that despite the robust results, the impact of soft utilization, especially in the commercial segment, presents a continuing challenge.
Hospital stocks rallied at the beginning of the year, driven by hopes of gains from the new healthcare reform. The segment has also seen increasing consolidation with hospital operators like Tenet seeking acquisitions of smaller chains that are unable to cope up with the higher costs and declining admissions. There is also concern among these operators on enrollment delays and technical glitches with the healthcare website, apart from being financially impacted by bad debts associated with patients who are uninsured. Tenet’s peers include Universal Health Services (UHS), Community Health Systems (CYH), and Lifepoint Hospitals (LPNT).
Appaloosa invests in the global public equity and fixed income markets with a focus on equities and debt of distressed companies, bonds, exchange warrants, options, futures, notes, and junk bonds. According to Bloomberg Businessweek, the firm’s client base consists of high–net worth individuals, pension and profit sharing plans, corporations, foreign governments, foundations, universities, and other organizations. Investors commit to a locked period of three years during which their withdrawals are limited to 25% of their total investment.
Appaloosa founder David Tepper’s investment specialty is distressed companies. While most hedge funds underperformed the U.S. stock market in 2012, Tepper’s flagship hedge fund successfully bet on stocks and other securities at key moments in 2012, posting a net return of nearly 30%. In recent years, he’s become known as a philanthropist. His largest gift of $67 million went to Carnegie Mellon University in 2013, whose Tepper School of Business is named after him. He earned his BA in Economics from the University of Pittsburgh in 1978 and his MBA (then known as an MSIA) from Carnegie Mellon in 1982.
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