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Here's Why You Should Retain Universal Health (UHS) for Now

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Universal Health Services, Inc. (UHS - Free Report) has been in investor’s good books courtesy of strategic measures and strong segmental contributions.

Notably, most hospital companies bore the brunt of the COVID-19 pandemic and Universal Health was no exception to the trend. The company suffered muted business volumes due to the COVID-19 breakout. However, it has been recovering and is now positioned better to weather the business loss.

Its favorable VGM Score of A is a testament to the same. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors.

The company beat estimates in the trailing two quarters and missed the same twice. It has a trailing four-quarter earnings surprise of 106.3%, on average.

Here we discuss the reasons for retaining this currently Zacks Rank #3 (Hold) company in your investment portfolio.

The company's segments, namely Acute Care and Behavioral Health, have been contributing to its performance over the past several years.

The top line witnessed a CAGR of 9.8% over the 2010-2019 period, led by solid segmental contributions, higher admissions and patient days.

Although the same dipped marginally in the first six months of 2020 owing to the coronavirus impact, we expect the same to bounce back post the pandemic. Average licensed beds at Acute Care and Behavorial platform have been rising since several years and in turn driving revenues.

Behavioral patient days returned close to pre-COVID-19 levels by the middle of June to the month-end when the second wave of coronavirus hit hard.

Acute care is a branch of secondary healthcare where a patient receives short-term treatment for urgent medical conditions and the position is quite upbeat in the market.

Over the years, acquisitions have played a key role in building Universal Health’s growth trajectory, by adding facilities, bed and hospital to its business portfolio. In 2018 and 2019, the company spent a total of $110 million and $8 million, respectively, on buyouts. We believe that the company will continue making acquisitions that will help it expand domestic and international presence, and position it better to weather the regulatory uncertainty in the healthcare sector.

The company's balance sheet position also remains a positive. Its net debt is 32.5% of capital, much lower than the industry’s average of 80.8%. Also, its times interest earned stands at 7.9X, much higher than the industry’s average of 2.9X. As of Jun 30, 2020, it had cash and cash equivalents of $600 million and $1.4 billion of aggregate available borrowing capacity, higher than the current portions of long-term debt of $82 million. The company doesn’t have to repay a huge portion of its total debt load within a year. Thus, its financial flexibility is impressive.
 
However, the company withdrew its 2020 outlook given the current unprecedented environment. This remains a concern for investors. Moreover, it has suspended its share buyback program and dividend payout owing to the current situation.

Its long-term growth rate is projected at 8%, higher than its industry's average of 7.7%.

Shares of the company have in gained 12.8% in six months’ time, compared with the industry's rally of 25.5%.


Notably, other companies in the same space include Community Health Systems, Inc. (CYH - Free Report) , Acadia Healthcare Company Inc. (ACHC - Free Report) and HCA Healthcare Inc. (HCA - Free Report) , which have gained 113.7%, 47.6% and 27.4%, respectively, in the same time frame. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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