With the market back on track, it’s all about finding the right opportunities at the right prices. Not overpaying is very important, especially as I think we’re still in for an uptick in volatility down the road. That’s why it’s also important that you don’t chase after the “hot” stocks that would be the most vulnerable during a market sell-off. Keeping these factors in mind, Universal Health Services, Inc. (NYSE:UHS) makes for a great investment as it offers strong growth at a discount.
Founded by Alan B. Miller in 1979, Universal Health Services is a large healthcare facilities company that operates behavioral health centers, acute care hospitals and ambulatory centers. It has 293 inpatient and 24 outpatient behavioral facilities in the United States and the UK (its UK presence was greatly expanded by last year’s acquisition of Cambian Group for $464 million, putting UHS at 102 behavioral health facilities in the region).
It also operates 26 inpatient acute care hospitals in the United States, four free standing emergency rooms, four outpatient surgical centers and one surgical hospital.
Although the company operates more behavioral health centers, the majority of its revenues — 52.4% through the first nine months of 2017 — come from acute care hospitals. However, the former has higher operating margins and contributed 61.7% of the operating profits over the same time period.
To continue growing, management’s strategy is to build or purchase healthcare properties in rapidly expanding markets and create a strong franchise based on exceptional service and effective cost control. They feel that they owe their past success to a responsive style and service philosophy that is based on integrity, competence and compassion.
I like a company that serves with integrity and genuinely wants to help people, but that’s not the only reason I recommend it. UHS is also well managed and has had a strong growth record in recent years thanks to the Affordable Care Act (ACA). Revenues rose from $6.92 billion in 2012 to $9.75 billion in 2016 as inpatient admissions grew 22.2% at behavioral health and 11.8% in healthcare. The higher sales allowed EPS to grow from $4.52 to $7.32 over the same timeframe.
The stock is also attractively valued after pulling back from its March high of $130, which gives it a good margin of error. The decline was due to earnings coming under pressure this year, reflecting rising wage costs in behavioral health, increased legal and regulatory costs, expenses related to the implementation of electronic health records and the impact of the hurricanes.
Rallies on Strong Fourth Quarter
UHS roared back to life after reporting a very strong quarter on Feb. 28. Earnings of $1.99 a share (versus $1.78 a share last year) came in 15 cents better than expected. Revenues of $2.64 billion were up 6.7% and beat the expected $2.63 billion. Earnings guidance of $9.25-$9.90 a share for 2018 also easily topped estimates of $8.60 a share thanks to the positive impact of tax reform.
I think the post-earnings strength reflects a couple of factors. First, Wall Street clearly ignored the fact that UHS was going to be a major beneficiary of tax reform. Second, management gave very strong guidance for same-store sales for both behavioral and acute care centers for next year, which should drive earnings growth as much as 10% excluding the tax benefits.
I believe UHS can easily hit $130 again before year-end. If the company can prove that it’s on its way to meeting expectations of mid-single-digit same-store sales growth for both the acute and behavioral units this year, there could be upside beyond that price especially considering that the stock traded as high as $145 when hospital names were hot as the ACA figured to increase utilization and reduce bad debt expense.
Plus, it could be a go-to safe haven should the broader market swoon.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.