2023-07-12 07:22:36 ET
Summary
- Universal Health Services has seen significant growth despite cost issues, with shares up 22% since November 2022, outperforming the S&P 500's 12.2% increase.
- The company's revenue has continued to expand, with sales of $3.47 billion in the first quarter of 2023, a year-over-year increase of 5.3%, largely driven by acute care hospital services and behavioral health services.
- Despite a decline in profits from 2021 to 2022, the company's outlook is positive, with management predicting continued revenue growth and the bottom line expansion.
The great thing about quality companies that are trading on the cheap and that continue to grow is that, even after they experience significant upside, additional upside might still exist. One company that I could point to that fits this description perfectly, at least in my opinion, is Universal Health Services ( UHS ). With a market capitalization of $10.6 billion, Universal Health Services is a sizable player in the business of owning and managing health care facilities. Recent financial performance has helped to push shares up at a rate there has been nearly double the broader market. Relative to similar firms, shares of the company do look to be fairly valued. But on an absolute basis, UHS stock is still attractively priced. Absent anything unexpected coming out of the woodwork, I would argue that further upside for shareholders exists from here.
Strong results continue
It has been going on almost a year since I last wrote about Universal Health Services. In my most recent article on the company, published in November of 2022, I recognized that the company was experiencing some issues when it came to costs. Even so, top line performance was appealing and shares were priced at levels that were low enough that indicated attractive upside was probable. These factors combined led me to keep the company rated a ‘buy’ to reflect my view at the time that the stock should outperform the broader market for the foreseeable future. So far, this has played out nicely. Since the publication of that article, shares are up 22% compared to the 12.2% increase seen by the S&P 500. And since first rating the company a ‘buy’ in September of 2021, shares have generated upside of 5.7% compared to the 1.5% the S&P 500 enjoyed.
Most recently, the picture for the company has been rather interesting. Before we get into data covering the first quarter of 2023, it's important to highlight some of the challenges the company faced in 2022. On the good side, revenue for the firm came in at $13.40 billion. That's a sizable improvement over the $12.64 billion the company generated in 2021. But in spite of this, high costs negatively affected the enterprise. Profits fell from $991.6 million to $675.6 million. Operating cash flow did manage to increase from $883.7 million to $966 million. But if we adjust for changes in working capital, we would have seen that number drop from $1.62 billion to $1.38 billion. Meanwhile, EBITDA for the firm declined from $1.90 billion to $1.66 billion.
So far, the 2023 fiscal year is proving to be a year of improvement for the company. For starters, revenue is continuing to expand. Sales of $3.47 billion generated in the first quarter of the year translated to a year over year increase of 5.3% over the $3.29 billion reported one year earlier. This pop higher in revenue was driven largely by a $193 million increase associated with the firm’s acute care hospital services and behavioral health services. When it came to the acute care hospital services, the firm benefited to the tune of $61 million, largely as a result of a 7.2% rise in inpatient admissions. And when it comes to the behavioral health services side of the picture, the company saw a $124 million increase in sales that was attributable to inpatient admissions growing by 7.5%.
Unlike the 2022 fiscal year, the 2023 fiscal year is showing some improvement on the bottom line as well. During the first quarter, net profits totaled $163.1 million. That's up nicely compared to the $153.9 million generated one year earlier. Operating cash flow did plunge from $445.4 million to $290.8 million. But if you adjust for changes in working capital, you get an increase from $314.9 million to $324.7 million. And finally, EBITDA for the company expanded from $379.5 million to $421.1 million.
One of the really great things about management is that they are quite open when it comes to expectations for the current fiscal year. They believe that revenue will continue to grow, hitting between $14.04 billion and $14.31 billion. At the midpoint, this would translate to an increase of 5.8% compared to what the company achieved in 2022. Earnings per share should be between $9.50 and $10.50. Assuming the firm's share count remains unchanged, hitting the midpoint here would translate to net profits of $714.9 million. That's also 5.8% above what was seen last year. And finally, EBITDA should range between $1.66 billion and $1.75 billion. No guidance was given when it came to other profitability metrics. But if we assume that the adjusted operating cash flow for the company should increase at the same rate that EBITDA is forecasted to, we would expect a reading for the year of $1.42 billion.
Using these numbers, it's quite easy to value the company. In the chart above, you can see how shares are priced on a forward basis for 2023. You can also see how the stock is priced using data from both 2021 and 2022. The stock is not as cheap as it was back in 2021. But on a forward basis, it is looking better than last year. In particular, the stock does look cheap when it comes to cash flow. This is always great to see since I prioritize adjusted operating cash flow above the other two metrics. In the table below, I decided to compare the company to five similar firms. Using both the price to earnings approach and the price to operating cash flow approach, I found that two of the five firms ended up being cheaper than Universal Health Services. And when it comes to the EV to EBITDA approach, three of the five ended up being cheaper than our prospect.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Universal Health Services | 15.7 | 7.7 | 9.2 |
HCA Healthcare ( HCA ) | 14.8 | 9.5 | 9.0 |
Ensign Group ( ENSG ) | 21.7 | 18.5 | 12.8 |
Acadia Healthcare Company ( ACHC ) | 26.1 | 20.9 | 14.8 |
Tenet Healthcare ( THC ) | 22.1 | 6.8 | 8.4 |
Community Health Systems ( CYH ) | 14.6 | 2.9 | 7.6 |
It is worth noting that, in addition to the stock looking attractively priced on an absolute basis, management continues to allocate significant amounts of capital toward shareholders. In 2022, for instance, the company bought back 6.67 million shares of stock for a combined $810.8 million. And in the first quarter of 2023, they repurchased 650,000 shares for $78.7 million. That leaves about $869 million worth of capacity under the company's share buyback program. Given how shares are priced at the moment, exercising that in its entirety would result in the company's share count dropping about 8.2% from where it is today. That is rather significant, especially for a company that has already bought back a tremendous amount of shares.
Takeaway
I know that the picture has not been exactly perfect for Universal Health Services over the past couple of years. The decline in profits from 2021 to 2022 was certainly discouraging. However, that picture does look set to improve moving forward. The stock is also attractively priced on an absolute basis, while being perhaps closer to fairly valued compared to similar firms. All of this combined makes me feel as though some additional upside is probable for shareholders. And as such, I do believe that the ‘buy’ rating I assigned the stock previously should still hold.
For further details see:
Universal Health Services: Business Is On The Mend