Universal Health Services, Inc. UHS, based in King of Prussia, PA, currently offers an attractive valuation. The stock's forward earnings multiple of 10.21X is notably lower than its five-year median of 12.02X and the medical hospital industry average of 11.65X. When compared to other medical facility operators like Tenet Healthcare Corporation THC and HCA Healthcare, Inc. HCA — with forward 12-month P/E ratios of 11.06X and 11.96X, respectively — UHS stands out as a more affordable option. Additionally, the company boasts a Value Score of A, reinforcing its appeal to value-focused investors.

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Over the past year, Universal Health shares have gained 17.2%, significantly outpacing the industry average gain of 4.5%. However, the stock has underperformed compared to the broader S&P 500 Index.

Stock Price Performance – UHS, THC, HCA, Industry & S&P 500

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With the stock trading at a discount, we examine UHS’ growth drivers and challenges to determine if it presents a strong investment opportunity for investors at this time.

Tailwinds for Universal Health Services

The hospital management company continues to experience revenue growth in its Acute Care Hospital Services and Behavioral Health Care Services segments, driven by rising adjusted admissions and patient days. Adjusted admissions in the Acute Care segment grew 8.8% year over year in 2021, 5.7% in 2022, 6.5% in 2023, and 4% during the first three quarters of 2024. Similarly, adjusted patient days in the Behavioral Health segment increased by 0.6% in 2021, 1.1% in 2022, 1.7% in 2023, and 1.8% in the first nine months of 2024.

These trends underscore the growing demand for UHS services. To address this rising demand, the company strategically pursues acquisitions, which significantly contribute to its growth trajectory. The company’s strong financial foundation supports its expansion efforts.

UHS generated $1.3 billion in operating cash flow in 2023, reflecting a 27.3% year-over-year increase. In the first nine months of 2024, operating cash flow rose by an impressive 72.8% year over year. Moreover, the company’s long-term debt-to-capital ratio of 40.9% is substantially lower than the industry average of 85.3%, highlighting its efficient financial management.

UHS’ robust cash generation also bolsters its efforts to enhance shareholder value. During the first nine months of 2024, the company repurchased shares worth approximately $349 million. As of Sept. 30, 2024, UHS retained a remaining share repurchase capacity of around $1.1 billion, demonstrating its commitment to returning value to shareholders.

UHS Earnings Estimates & Surprise History

The Zacks Consensus Estimate for 2024 adjusted earnings for UHS is currently pegged at $15.88 per share, indicating a 50.7% year-over-year surge. The same for 2025 indicates a further 11.4% growth. The estimates remained stable over the past month. The consensus estimate for 2024 and 2025 revenues suggests 9.9% and 6.1% year-over-year growth, respectively.

It beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 12.1%.

UHS Stock: A Hold for Now

Universal Health’s stock, despite trading at a discount, might not be the ideal choice for new investors at this time. While current shareholders can take advantage of its lower valuation, increasing revenues, solid financial performance and favorable estimates, potential buyers may want to wait before making a move.

The hospital industry as a whole is grappling with multiple challenges, including the new administration's emphasis on reducing government spending and possible policy changes that could impact hospital profits in the short term. Moreover, uncertainties surrounding decreased hospital funding and the expiration of insurance subsidies add to the sector's concerns.

A steep increase in operating expenses has been a major concern for the company. In 2021, 2022, 2023 and the first three quarters of 2024, the metric rose 10.6%, 9.9%, 5.7% and 7.9%, respectively, year over year. As resource utilization, salaries, wages, benefits, supply costs, and lease and rental expenses continue to grow, operating costs are expected to rise even further in the future.

Additionally, UHS’ Return on Invested Capital stands at 9.54%, well below the industry average of 12.89%. This suggests that the company is not generating competitive returns on its invested capital compared to its peers.

So, while UHS shows strong financial health and growth potential, investors should be cautious of the headwinds mentioned above. With Universal Health carrying a Zacks Rank #3 (Hold), new investors should consider staying on the sidelines until a more attractive entry point emerges. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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