Universal Health Services, Inc. (UHS Quick QuoteUHS - Free Report) is well poised to grow on the back of accretive acquisitions and robust performance of behavioral health hospitals.

Universal Health — with a market cap of $10.2 billion — is a hospital and healthcare service provider. Based in King of Prussia, PA, the company is engaged in providing general and specialty surgery, emergency room care, radiology, pharmacy and behavioral health, and many other services. It owns and operates (through its subsidiaries) surgical hospitals, ambulatory surgery centers, acute care hospitals, behavioral health centers, and others.

It beat earnings estimates thrice and missed once in the last four quarters, with an average surprise of 17.6%. Courtesy of solid prospects, this Zacks Rank #3 (Hold) stock is worth holding on to at the moment.

What’s Driving the Stock?

The ongoing pandemic has ramped up the demand for overall hospital and healthcare services around the globe. Equipped with state-of-the-art technology and a massive network in the domestic market as well as in the United Kingdom and Puerto Rico, Universal Health is well positioned to generate massive profits.

Universal Health has a strong balance sheet, which provides it with financial flexibility. Its long-term debt to capitalization of 36.8% compares favorably with the industry average of 89.7%. At third quarter-end, it had cash and cash equivalents of $190 million, much higher than the current portion of long-term debt of $44.9 million. This means the company can bank on balance sheet strength for future acquisitions to grow its business inorganically.

For the past few years, Universal Health has relied on acquisitions to build a sturdy growth trajectory. It added multiple facilities, beds and hospitals to the business portfolio over the years. Last year, it spent $52 million on the acquisition of businesses and properties. In 2021, it acquired 88 beds through the buyout of a Las Vegas specialty hospital and a LEED Medical Center micro hospital. The company is expected to continue making acquisitions to expand its domestic and international presence.

UHS’s strategic moves to boost revenue growth are commendable. Last year, the company instated 439 beds at its acute care and behavioral health hospitals. Also, it inaugurated three Freestanding Emergency Departments, with the plan of opening another five in 2022. This month, it teamed up with Riverside Medical Clinic in the Riverside County of California. The move will likely boost UHS’ network in Southern California. These initiatives are expected to contribute to top-line growth going forward.

Downsides

There are a few factors that are impeding the growth of the stock lately.

Rising operating expenses have been eating into its profits for the past few years. For the first nine months of 2021, operating expenses increased 10.5% year over year due to high salaries, wages and benefits, supply costs, and others. Hence, escalating expenses can put further pressure on margins. Also, its cash flow situation is concerning. For the first nine months of 2021, net operating cash flow declined to $561.7 million from the year-ago level of $2,218.2 million, primarily due to lower government stimulus. Free cash outflow after dividends amounted to $198 million for the trailing 12-month period. Nevertheless, we believe that a systematic and strategic plan of action will drive Universal Health’s long-term growth.

Key Picks

Some better-ranked players in the Medical space include Community Health Systems, Inc. (CYH Quick QuoteCYH - Free Report) , Athersys, Inc. and Aptose Biosciences Inc. (APTO Quick QuoteAPTO - Free Report) , each having a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Based in Franklin, TN, Community Health is a leading operator of general acute care hospitals and outpatient facilities in communities across the country. This year, its net income per share is anticipated in the range of $1-$1.20, up from the previous guidance of 60-80 cents. Capex for the year is expected within $450-$500 million. Community Health’s bottom line has witnessed five upward estimate revisions in the past 30 days compared to none in the opposite direction. CYH beat earnings estimates in the last four quarters, with an average of 675%.

Headquartered in Cleveland, OH, Athersys operates in the regenerative medicines field. Its MultiStem cell therapy is making major improvements in treating patients from neurological damage. The company’s bottom line for 2021 is expected to jump 21.4% year over year. ATHX’s earnings estimates have witnessed one upward revision and no downward movement in the past 30 days. Athersys’ collaborative move with Healios is expected to boost its commercial success in Japan.

Aptose Biosciences — based in Toronto, Canada — develops personalized therapies for oncology-related needs in the United States. Its license agreement with Hanmi Pharmaceutical for Clinical Candidate HM43239 can be a major positive for the company. APTO’s bottom line for 2021 is expected to jump 1.5% year over year. The company’s earnings estimates witnessed two upward movements and no downward revisions in the past 30 days. Aptose Biosciences beat earnings estimates twice in the past four quarters and missed the same on the other two occasions. It has an earnings surprise of 7% during this time period.

Price Performances

Universal Health has jumped 4.7% in the month-to-date period against a 1.9% decline of the industry.

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During this time period, Community Health and Aptose Biosciences have increased 9% and 19.5%, respectively, while Athersys has declined 12.8%.