Advertisement
U.S. markets close in 5 hours 44 minutes
  • S&P 500

    5,251.61
    +3.12 (+0.06%)
     
  • Dow 30

    39,775.73
    +15.65 (+0.04%)
     
  • Nasdaq

    16,388.38
    -11.14 (-0.07%)
     
  • Russell 2000

    2,121.58
    +7.23 (+0.34%)
     
  • Crude Oil

    82.47
    +1.12 (+1.38%)
     
  • Gold

    2,207.50
    +16.90 (+0.77%)
     
  • Silver

    24.72
    -0.03 (-0.13%)
     
  • EUR/USD

    1.0808
    -0.0021 (-0.19%)
     
  • 10-Yr Bond

    4.1960
    0.0000 (0.00%)
     
  • GBP/USD

    1.2640
    +0.0001 (+0.01%)
     
  • USD/JPY

    151.2630
    +0.0170 (+0.01%)
     
  • Bitcoin USD

    70,787.56
    +1,622.77 (+2.35%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,959.92
    +27.94 (+0.35%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Should Investors Be Happy About Universal Health Services, Inc.’s (NYSE:UHS) Cash Levels?

Two important questions to ask before you buy Universal Health Services, Inc. (NYSE:UHS) is, how it makes money and how it spends its cash. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine UHS’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.

View our latest analysis for Universal Health Services

What is free cash flow?

Universal Health Services’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Universal Health Services to continue to grow, or at least, maintain its current operations.

I will be analysing Universal Health Services’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.

Free Cash Flow = Operating Cash Flows – Net Capital Expenditure

Free Cash Flow Yield = Free Cash Flow / Enterprise Value

where Enterprise Value = Market Capitalisation + Net Debt

Along with a positive operating cash flow, Universal Health Services also generates a positive free cash flow. However, the yield of 3.35% is not sufficient to compensate for the level of risk investors are taking on. This is because Universal Health Services’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.

NYSE:UHS Net Worth January 9th 19
NYSE:UHS Net Worth January 9th 19

What’s the cash flow outlook for Universal Health Services?

Does UHS’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 14%, ramping up from its current levels of US$1.3b to US$1.5b in two years’ time. Furthermore, breaking down growth into a year on year basis, UHS is able to increase its growth rate each year, from 5.3% next year, to 8.5% in the following year. The overall future outlook seems buoyant if UHS can maintain its levels of capital expenditure as well.

Next Steps:

Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, You should continue to research Universal Health Services to get a more holistic view of the company by looking at:

  1. Valuation: What is UHS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether UHS is currently mispriced by the market.

  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Universal Health Services’s board and the CEO’s back ground.

  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Advertisement