Is Universal Health Services (UHS) Modestly Undervalued?
Universal Health Services Inc (NYSE:UHS), a prominent player in the healthcare industry, experienced a daily loss of 3.44% and a 3-month drop of 7.88%. Despite these downward trends, the company's Earnings Per Share (EPS) (EPS) stands at 9.63. This raises the question: is the stock modestly undervalued? In this article, we will delve into a comprehensive valuation analysis of Universal Health Services.
Company Overview
Universal Health Services Inc (NYSE:UHS) owns and operates a wide range of medical facilities, including acute care hospitals, behavior health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. The company operates two key segments: Acute Care Hospital Services and Behavioral Health Services. Despite the recent downturn, the company's stock price of $131.59 is still lower than its fair value (GF Value) of $168.82, suggesting that the stock may be modestly undervalued.
Understanding the GF Value
The GF Value is a unique measure that represents the intrinsic value of a stock. This value is derived from historical trading multiples, a GuruFocus adjustment factor based on the company's past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Universal Health Services (NYSE:UHS) appears to be modestly undervalued according to the GF Value. This suggests that the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it is crucial to review a company's financial strength before deciding whether to buy shares. Universal Health Services has a cash-to-debt ratio of 0.02, which ranks worse than 95.2% of companies in the Healthcare Providers & Services industry. Based on this, GuruFocus ranks Universal Health Services's financial strength as 5 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies is generally less risky, especially those that have demonstrated consistent profitability over the long term. Universal Health Services has been profitable 10 over the past 10 years. Its operating margin is 7.94%, which ranks better than 65.59% of companies in the Healthcare Providers & Services industry. Overall, GuruFocus ranks the profitability of Universal Health Services at 9 out of 10, which indicates strong profitability.
One of the most important factors in the valuation of a company is growth. The average annual revenue growth of Universal Health Services is 12.4%, which ranks better than 60.84% of companies in the Healthcare Providers & Services industry. However, the 3-year average EBITDA growth is 3.3%, which ranks worse than 61.45% of companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate a company's profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, Universal Health Services's ROIC is 7.11 while its WACC came in at 8.57.
Conclusion
In summary, the stock of Universal Health Services (NYSE:UHS) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks worse than 61.45% of companies in the Healthcare Providers & Services industry. To learn more about Universal Health Services stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
