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UHS or THC: Which is a Better-Positioned Stock Right Now?

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The Zacks Medical - Hospital industry faced disruption due to the COVID-19-led pandemic. However, they are slowly limping back to normalcy by resuming surgeries and other healthcare services.

The hospital industry suffered heavily due to the COVID-19-induced business loss. Cancellation in elective surgeries to make room for coronavirus-infected patients hurt the company’s revenues. The companies also withdrew their respective guidance due to the current market situation. Most companies halted share buybacks in order to preserve cash amid these uncertain economic times.

Nevertheless, the hospitals are well-poised for growth on the back sustainable balance sheets, accretive mergers and acquisitions, divestitures to pay off debt, favorable cash flow generation, telemedicine services, increased demand for products and services, etc. Some are even trying to curb costs through regulation of variable cost structure, reduction in discretionary spending, temporary salary cuts, furloughing of employees and so on.

Companies have been investing heavily in telehealth, which got ample response amid the COVID-19 environment. For instance, Community Health Systems, Inc. CYH made the most of rise in adoption of telehealth medicines. In the second quarter, it managed to deliver more than 230,000 Telehealth visits. HCA Healthcare, Inc. HCA also expanded its telemedicine product offerings. In the second quarter, it performed more than 500,000 telemedicine visits.

The overall bullish scenario makes us upbeat about consistent growth in this industry, which should boost prospects of the companies with strong business fundamentals.

Against this backdrop, let’s look at the two leading hospital companies, namely Universal Health Services, Inc. UHS and Tenet Healthcare Corporation THC with their respective market capitalization of $9 billion and $2.5 billion. Each stock currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past six months, Universal Health and Tenet Healthcare have gained 36.2% and 58.8%, respectively. The industry has rallied 40.9% in the same time frame compared with the S&P 500 composite’s rise of 36%.

Let's analyze certain other parameters to find out which company is better placed.



Earnings Surprise History

A stock’s earnings surprise track helps investors get a fair enough idea about its performance in the previous quarters.

Tenet Healthcare’s bottom line managed to beat estimates in three of the trailing four quarters (while missing the mark in one), the average surprise being 191.4%. Notably, Universal Health’s earnings surpassed the consensus mark in two of the trailing four quarters (while lagging estimates on two occasions), the average beat being 106.3%.

While both companies have an average positive earnings surprise, Tenet Healthcare has an edge over Universal Healthhere.

Return on Equity

Return on equity is a profitability measure, which accounts for profits generated on shareholders’ equity. Hence, higher ROE reflects the company’s efficiency in utilizing its shareholders’ funds and is preferred by all equity investors.

Tenet Healthcare’s ROE of 82.4% compares favorably with Universal Health’s ROE of 14.8%.

Valuation

Price-to-EBITDA value is one of the multiples used for valuing hospital companies. Comparing with the industry’s trailing 12 month’s P/EBITDA ratio of 3.07, Tenet Healthcare and Universal Health have a reading of 0.9 and 5.3 each.

It is clear that here Tenet Healthcare’s valuation is better than Universal Health.

Earnings Guidance

Earnings growth along with stock price appreciation is often indicative of a company’s strong potential.

The Zacks Consensus Estimate for Universal Health’s 2020 earnings implies a 5.8% decrease from the year-ago reported figure while the same for Tenet Healthcare suggests an increase of 48.1% from the prior-year reported number.

Tenet Healthcare is a visible winner here.

Debt to Capital

Universal Health’s leverage ratio of 38X betters Tenet Healthcare’s ratio of 96.2X. Therefore, Universal Health is at an advantage over Tenet Healthcare on this front.

Bottom Line

Our comparative analysis shows that Tenet Healthcare is better-placed than Universal Health with respect to its earnings surprise, ROE, valuation and earnings guidance. Meanwhile, Universal Health scores higher in terms of leverage ratio. As the scale is slightly tilted toward Tenet Healthcare, the stock discernibly makes a more promising investment proposition.

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Universal Health Services, Inc. (UHS) : Free Stock Analysis Report
 
Community Health Systems, Inc. (CYH) : Free Stock Analysis Report
 
Tenet Healthcare Corporation (THC) : Free Stock Analysis Report
 
HCA Healthcare, Inc. (HCA) : Free Stock Analysis Report
 
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