Universal Health Services, Inc. (UHS) owns and operates a chain of hospitals across the U.S., U.K. and Puerto Rico. Its Acute Care Hospital Services segment that delivers in-patient care has been in high demand over the past year, given the high rate of coronavirus infections in the countries in which it operates. The stock has gained 38.4% over the past nine months.
However, with mass vaccination drives and remote lifestyles, the U.S. has begun curbing the spread COVID-19 infections. On February 15, the U.S. reported its lowest daily new cases since October.
But as hospitals and the medical care sector in general gradually return to normal, a projected decline in demand for acute care in the coming months has caused UHS to decline 6.8% year-to-date.
Here’s what I think could drive UHS’ performance:
Resurgence of Demand for Non-Critical Healthcare
As the COVID-19 outbreak is brought under control through vaccination and effective therapies to treat severe cases, people are likely to reschedule their routine doctor visits and check-ups. In addition, non-critical surgeries that were postponed due to the pandemic are likely to be rescheduled once social distancing requirements are lifted.
The side-effects of coronavirus have been reported as severe for many patients who have recuperated from the disease. And some people are even suffering from the side effects of the vaccine. Consequently, hospitals have been seeing an influx of patients suffering from critical side effects. As the vaccine distribution continues ramping, in addition to COVID-19 in-patient treatments, the volume of cases with side-effects should support hospital admissions in the near term.
Trading at a Discounted Valuation
In terms of non-GAAP forward p/e, UHS is currently trading at 12.44x, 52.4% lower than the industry average 26.10x. The company’s trailing 12-month PEG of 0.47x is 42.9% lower than the industry average 0.82x.
UHS’ forward price/sales, price/cash Flow and EV/EBITDA ratios of 0.95, 4.64 and 7.73, respectively, compare favorably with industry averages.
Profitability and Projected Earnings Show Promise
UHS has generated $11.37 billion in revenues over the past 12 months. Its trailing-12-month gross profit is $4.53 billion, yielding a gross profit margin of 39.84%. The company’s trailing 12-month EBITDA margin of 12.17% is significantly higher than the industry average 1.16%.
Furthermore, UHS’ net income margin, ROE and ROA of 7.74%, 15.47% and 6.79%, respectively, compare favorably with negative industry averages.
A consensus EPS estimate of $2.53 for the current quarter (ending March 2021) represents a 46.2% rise year-over-year. UHS’ EPS is expected to rise 4.1% in fiscal 2021, and at a rate of 5% per annum over the next five years. Analysts expect the company’s revenues to rise 5% in the current quarter, and 4.2% in the current year.
Consensus Ratings and Price Target Indicate Potential Upside
UHS is currently trading 11.5% below its 52-week high of $143.84, which it hit on January 7, 2021. Analysts expect UHS to hit $148.64 soon, indicating a potential upside of 15.2%. UHS has an average broker rating of 1.73, indicating favorable analyst sentiment. Of 13 Wall Street analysts that rated the stock, two rated it Strong Buy and six rated it Buy.
According to MarketBeat, in January UHS has witnessed a large decline in short interest .Approximately 26.7% of investors reversed or closed their short positions during the last two weeks of the month. This implies that analysts and institutional investors expect UHS to gain momentum soon. As of January 28, 2021, UHS had a short interest ratio of 2.26, and short float of 1.97%.
POWR Ratings Show Promise
UHS has an overall rating of A, which equates to Strong Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
Our POWR Ratings also evaluate stocks by various components such as Value, Momentum, and Quality. In fact, the Value grade is determined by looking at 31 different factors.
It’s not surprising that UHS has an A grade for Value, and B for Quality and Stability. This is justified, given the company’s relative undervaluation and impressive financial performance.
It’s also good to know that the Medical – Hospitals industry is ranked #7 out of 124 industries. And in this top-rated group, UHS is ranked #3 of 10 Medical – Hospitals stocks.
All in all, the POWR Ratings system reviews UHS on eight different dimensions. We have only shared half of those above. So, if you want to know how it scores for Growth, Momentum and Sentiment grade, you can get all the UHS ratings here.
There are five other stocks in the Medical – Hospitals industry with an overall rating of A or B. Click here to see them.
The healthcare industry is expected to go through a structural transformation following the coronavirus pandemic to address limitations and weaknesses recognized amid the pandemic. As a leading hospital chain in the United States, UHS is expected to expand its operations in a recovering economy and to capitalize on higher non-COVID-19 demand in the coming months.
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UHS shares were trading at $126.83 per share on Thursday morning, down $2.19 (-1.70%). Year-to-date, UHS has declined -7.76%, versus a 4.08% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...
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