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Universal Health's Acute Care Segment Solid, High Debt Ails

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Despite several downsides, Chemed (CHE) witnesses solid revenue growth across key subsidiaries - VITAS and Roto-Rooter.

Universal Health Services, Inc. UHS is well-placed for growth on the back of solid acute care and behavioral platforms, leading to a steady top line. Strategic buyouts also poise the company well for growth.

The company’s revenues have been growing consistently since 2010. This uptrend was driven by a solid inorganic growth profile and a strong performance from both its segments, namely Acute Care and Behavioral Health. The top line has witnessed a CAGR of 10.35% from 2010 to 2018. Universal Health’s revenue growth is expected to continue with strong performances at both its segments.

Its acute care platform, which is a branch of secondary healthcare wherein a patient receives short-term treatment for urgent medical conditions, has been witnessing a rising number of licensed beds since 2012, thereby driving overall revenues. In fact, global market sentiments for acute care treatments are quite upbeat with North America accounting for the largest share in the space.

The company’s Behavioral Platform is also witnessing growth on the back of increasing average licensed beds. Behavioral facility acquisitions help Universal Health win market shares in the fast-growing addiction and mental health disorder market.

Moreover, buyouts played a key role in building Universal Health’s growth trajectory. During 2016, the company acquired the adult services division of Cambian Group, which significantly expanded its market presence in the U.K. During 2018, Universal Health spent $110 million on purchasing The Danshell Group and a 109-bed behavioral health care facility in Gulfport, MS.

However, the company has been suffering high-debt levels since 2013. Although the metric dipped in 2017, the same rose 12.6% in 2018 year over year. Also, interest expenses have been mounting on average of 11% since 2015, which is a nagging concern for the company.

Steep escalation in operating expenses has also been a major woe for the company since 2013. In 2016, the company witnessed a 9% year-over-year increase in operating expenses to $8.5 billion, accounting for 86.9% of the net revenues. Continuing with this trend, operating expenses recorded 87.7% and 87.4% of the total revenues, both in 2017 and 2018, respectively. Rising expenses are likely to drain the company's margin going forward.

Stocks to Consider

Investors interested in the medical sector can consider stocks like UnitedHealth Group Incorporated UNH, Centene Corporation CNC and WellCare Health Plans, Inc. WCG.

UnitedHealth operates as a diversified health care company in the United States. In the last four quarters, the company delivered average beat of 3.39%.

Centene operates as a diversified and multi-national healthcare enterprise in the United States. It came up with average earnings surprise of 4.99% in the trailing four quarters.

WellCare Health offers managed care services to government-sponsored health care programs. The company pulled off average positive surprise of 15.43% in the preceding four quarters.

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