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Universal Health Grows on Acquisitions, Rising Debt a Drag

Zacks Equity Research

Universal Health Services, Inc.'s UHS inorganic strategies substantially make it well positioned for long-term growth. Universal Health has been witnessing revenue growth for a long time, primarily driven by its frequent and strategic acquisitions and mergers. In 2016, the company acquired the adult services division of Cambian Group.

Universal Health specializes in providing care to underprivileged patients at low costs. Its acute care platform has been delivering strong underwriting results. Continuing the trend, in the first quarter of 2017, net revenue from acute care hospitals increased 4.8% year over year to $1.4 billion, accounting for 53.8% of the total revenue.

The company’s solid behavioral platform also continues to impress. In fact, behavioral facility acquisitions help Universal Health win market share in the fast growing addiction and mental health disorder market. In the first quarter of 2017, the segment’s revenues (46.2% of total revenue) rose 1.4% year over year to $1.2 billion.

The stock currently has a trailing 12-month P/B ratio of 2.32. This is at the lower end of its range of 2.20 to 3.61 in the same time frame. Moreover, it compares favorably with the market at large, as the current P/B ratio for the S&P 500 is at 3.64. This suggests that the company is undervalued compared to its peers. 

However, year to date, the stock has lost 13.2%, underperforming the Zacks categorized Medical-Hospitals industry’s decline of 3.3%. This underperformance was likely due to the company’s exposure to integration risks owing to several acquisitions, highly leveraged balance sheet, and margin contraction at both acute care and behavioral hospitals as well as surging operating expenses.

In addition, the company’s high-debt level has raised concerns over the last five years. This also led to rise in interest expenses.

Another area of concern for the company is the continuous increase in its operating expenses since 2013 which continued to rise in the first quarter of 2017 as well.

Zacks Rank & Key Picks

Universal Health presently has a Zacks Rank #3 (Hold). Investors can consider some better-ranked stocks like Align Technology, Inc. ALGN, EDAP TMS S.A. EDAP and Inogen Inc. INGN. All of the stocks sport a Zacks Rank #1(Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Align Technology, a medical dental supplies company, topped estimates in each of the last four quarters with an average beat of 59.23%.

Inogen is a medical instruments seller, which delivered positive surprises in each of the last four quarters with an average beat of 82.42%.

EDAP TMS also posted positive surprises in two of the last four quarters with an average beat of 366.67%

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