From a valuation perspective, Universal Health Services, Inc.’s UHS stock looks attractive. UHS is currently trading at a forward 12-month price/earnings (P/E) of 12.45X, a roughly 18% discount compared with the industry average of 15.12X. It also has a Value Score of A and a market cap of $14.2 billion.
Though Universal Health’s cheap valuation may present a potentially profitable opportunity for investors seeking value, a more comprehensive analysis is needed to determine if its discounted valuation is justified based on its fundamentals, growth prospects and prevailing market conditions.
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UHS Stock Outperforms Industry, Sector & S&P 500 in 6 Months
Universal Health’s shares have gained 23.6% in the past six months compared with the industry’s 16.6% growth. It has also outperformed the broader Zacks Medical sector’s 2.6% rise and the S&P 500 Index’s 9.5% increase in the said time frame.
6-Month Price Performance
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Business Tailwinds for UHS
Universal Health continues to benefit on the back of strong performance in its Acute Care Hospital Services and Behavioral Health Care Services segments, supported by a diverse treatment network and robust cash flows.
The top line is driven by increased patient volumes and higher patient days. In the first half of 2024, adjusted admissions in its acute care hospitals rose 3.9% year over year while adjusted patient days across UHS’ behavioral health facilities increased 1.7%. Management projects 2024 net revenues to range between $15.565 billion and $15.753 billion, the mid-point of which indicates a 9.6% increase from the 2023 figure.
The resumption of elective procedures postponed during the pandemic is likely to boost patient volumes and occupancy rates. Growing patient volumes, one of the most significant revenue contributors, bode well for any healthcare facility operator. Therefore, the benefits of the resumption will be reaped by Universal Health. Similar benefits are anticipated for other operators like HCA Healthcare, Inc. HCA, Tenet Healthcare Corporation THC and Community Health Systems, Inc. CYH.
The inpatient behavioral healthcare facilities of Universal Health also remain in place to cater to the continued incidence of mental health issues among Americans. UHS boasted a diversified treatment network as of June 30, 2024, with 359 inpatient and 48 outpatient and other facilities across 39 states, Washington D.C., the United Kingdom and Puerto Rico. The company is focused on expanding services, improving existing offerings, attracting top physicians and implementing strict financial and operational controls. These measures help improve service quality and subsequently, profitability.
A strong financial position is critical to supporting growth initiatives and Universal Health has demonstrated this with its solid cash reserves and operating cash flows. As of June 30, 2024, cash and cash equivalents were up 7.8% from 2023-end level. The company generated $1.1 billion in operating cash flows in the first half of 2024, a 64.6% year-over-year increase. This financial strength also supports shareholder returns through regular dividends and share repurchases. The company has maintained a stable dividend of 20 cents per share since 2019.
Earnings Estimates and History of Universal Health
The Zacks Consensus Estimate for 2024 earnings is currently pegged at $15.91 per share, indicating year-over-year growth of 51%. The estimate for 2025 earnings implies a year-over-year increase of 9.7%. It beat earnings estimates in each of the last four quarters, with the average surprise being 14.58%. Moreover, the consensus mark for 2024 and 2025 revenues indicates 9.8% and 5.5% year-over-year growth, respectively.
Roadblocks for UHS’ Business
Universal Health is facing increased operating costs, which were up 7.3% year over year in the first half of 2024, due to higher salaries, wages, benefits and other operational expenses. A continued escalation in cost level is expected to weigh on margins going forward. Additionally, the company's debt-laden balance sheet has led to higher interest expenses, which rose 2% year over year in the first half of 2024.
Conclusion: Keep the Stock on Hold for Now
Universal Health is benefiting from strong patient volumes, higher patient days and the resumption of elective procedures. Its diversified treatment network, focus on expanding services and robust cash flows support growth and shareholder returns. However, challenges such as escalating operating costs and a high debt burden continue to exist. While UHS is currently undervalued despite increasing share prices, investors are probably better off not buying the stock right now and waiting for a more favorable entry point. Those who already own the stock should hold on to it.
UHS currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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