Headquartered in King of Prussia, PA, Universal Health Services Inc. UHS stock has gained 12.8% year to date, significantly higher than the increase of 7.6% witnessed by the Zacks categorized medical sector. Notably, the sector has been suffering from President Donald Trump’s decision of abolishing the Obamacare Act that had significantly benefited it in generating higher revenues.
The company reported fourth-quarter 2016 adjusted earnings of $1.80 per share, a penny ahead of the Zacks Consensus Estimate. Earnings also improved 5.3% on a year-over-year basis driven by almost 6.9% increase in revenues continuing the uptrend since 2011.
Strategic acquisitions and mergers as a key inorganic growth strategy have played a crucial role in building Universal Health’s growth trajectory. During 2016, the company spent $614 million to acquire the adult services division of Cambian Group, PLC located in the U.K.; Desert View Hospital located in Pahrump, NV and various other businesses and real property assets.
Universal Health has been a pioneer in providing care to underprivileged patients at low costs. It has a solid acute care platform that keeps on delivering strong underwriting results year after year. As a percentage of the company’s consolidated net revenues, net revenues from acute care hospitals, outpatient facilities and commercial health insurer accounted for 52% during 2016, up 100 basis points (bps) year over year.
However, the company suffers from several headwinds as well.
Universal Health’s capital structure is dominated by high debt. In 2016, the company’s long-term debt totaled $4 billion, up 20% year over year leading to a debt-to-capital ratio of 48%, deteriorating 300 bps from 2015. The company’s debt-to-equity ratio is 0.88, higher than the industry average of 0.83 indication of the company’s substantial dependence on debt financing compared with peers.
Steep increase in operating expenses has also been a major concern for the company since 2013. In 2016, the company has witnessed a 9% year-over-year increase in operating expenses of $8.5 billion that accounted for 86.9% of net revenues.
The stock also seems to be overvalued from certain aspects. Its Price-to-Sales ratio is 1.11, higher than the industry average of 0.73. Additionally, the company’s Price-to-Cash flow ratio is pegged at 11.24, almost double the industry average of 5.42.
Zacks Rank and Stocks to Consider
Universal Health carries Zacks Rank #3 (Hold).
Better-ranked stocks from the medical sector include HCA Holdings, Inc. HCA, Inogen Inc. INGN and Avinger, Inc. AVGR. While Inogen sports a Zacks Rank #1 (Strong Buy), the other two companies hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.