Universal Can Boost Investors' Wellness

4/16/2012


  Recent Price
$41
  Dividend
$0.20
  Yield
0.5%
  P/E Ratio
10
  Shares (millions)
97
  Long-Term Debt as % of Capital
61%
  52-Week Price Range
$56.46 - $31.35

Universal Health Services ($41; UHS) is projected to earn $4.41 per share in 2012, implying growth of 9% — more than double the median for health-care-facilities companies in the S&P 1500 Index. Yet the shares trade at less than 10 times estimated earnings, a 20% discount to their peer group and below the three-year average trailing P/E of 13.

The company operates more than 200 hospitals, psychiatric clinics, and surgical centers. Its growth is tied to:

• The U.S. labor market, which has expanded in 18 straight months.

• Health-care utilization rates, which insurers expect to rebound this year from historically low 2011 levels.

Shares should get a lift this summer if the Supreme Court rules in favor of the Affordable Care Act, which would require most Americans to purchase coverage and could boost the number of covered Americans by up to 30 million. Universal Health is rated Buy.

Corporate profile

Universal Health operates six surgical hospitals and radiation oncology centers, plus 25 acute-care hospitals. These facilities accounted for 55% of revenue and 33% of operating profits last year. Sales crept 4% higher last year, though profit margins shrank, hurt in part by a higher number of uninsured and underinsured patients.

The company also runs 198 behavioral-health centers, which generated 45% of revenue in 2011, up from 25% in 2009, and 67% of profits. A big chunk of that growth arrived all at once, in the form of a $3.04 billion acquisition of Psychiatric Solutions in November 2010.

About 15% of Universal Health's patient revenue comes from Medicaid and 22% from Medicare. During the last six months of 2011, Medicaid rates have fallen 3% to 4% in states where Universal Health operates; rates are projected to be flat or lower in Medicaid's fiscal year ending July 2013. But rates from commercial insurers (43% of patient revenue) have been rising 5% to 7% in Universal Health's recent contract renewals.

Operating profit margins widened in each of the last four years, topping 15.8% in 2011 despite a historically high level of uncompensated care. The company has grown sales and cash provided by operations by more than 14% in each of the last five quarters. Free cash flow, rising in six straight quarters, jumped 70% in 2011.

Universal Health borrowed heavily to fund its Psychiatric Solutions acquisition and currently has more than $3.6 billion in long-term debt outstanding, equating to 61% of total capital. However, the interest payments are well covered by earnings. Universal wants to regain the investment-grade status it lost after the acquisition, and its long-term debt declined nearly 7% in the four quarters since the merger. The company is likely to deploy much of its future cash flows to retire debt.

CEO Alan B. Miller holds an 8% equity interest in Universal Health but 87% of the voting power. While such centralized control adds risk to an investment, the company seems well managed and capable of continued operational growth and solid stock returns. An annual report for Universal Health Services is available at 367 South Gulph Road, P.O. Box 61558, King of Prussia, PA 19406; (610) 768-3300; www.uhsinc.com.

UNIVERSAL HEALTH SERVICES
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '11
0.99
vs.
0.58
+ 18%
43.10
-
31.35
12 - 9
Sep '11
0.86
vs.
0.55
+ 40%
55.42
-
33.49
17 - 10
Jun '11
1.04
vs.
0.68
+ 42%
56.46
-
44.68
19 - 15
Mar '11
1.15
vs.
0.73
+ 42%
49.75
-
41.43
20 - 16
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
7.50
4.04
0.20
56.46
-
31.35
14 - 8
2010
5.57
2.54
0.20
44.04
-
28.40
17 - 11
2009
5.20
2.49
0.17
33.32
-
15.22
13 - 6
2008
5.02
1.90
0.16
34.63
-
15.30
18 - 8
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
73
94
89
40
33
58

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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