Universal Health Services: a stock in the pink of health

When Universal Health Services (NYSE: UHS) reported better than expected earnings and revenue for the second quarter of 2019, the company's share price jumped to an intraday high of US$157.79 before closing at US$151.89, with a record high of US$152.87 a few days later.

At the start of the year, the stock was trading around the US$113-$118 region. Those that have held onto their UHS stock have had to endure some volatility, but have been rewarded with gains in the region of 30%.

Looking at a long-term weekly chart, the jump in late July saw the stock break through the top of a four-year consolidation pattern. At the same time, the move to record high prices signals a resumption of the underlying 10-year upward trend.

Given the stock's historical movement, near term dips are likely to be well supported. There also seems to be good potential for further gains.

Who is Universal Health Services and what do they do?

Universal Health Services (UHS) is one of America's largest hospital management companies. It operates and manages more than 350 acute care hospitals, behavioural health facilities and ambulatory centres across the US, Puerto Rico and the UK.

The company was founded in 1979 by Alan B. Miller, who is now the current chairman and chief executive. The hospital operator employs more than 87,000 people.

In a recent statement, Miller says: "Our operating philosophy is as effective today as it was 40 years ago, enabling us to provide compassionate care to our patients and their loved ones: Build or acquire high quality hospitals in rapidly growing markets, invest in the people and equipment needed to allow each facility to thrive, and become the leading healthcare provider in each community we serve."

Over the past three years alone, UHS has invested about US$1.5 billion in facility and technology upgrades to drive innovation, improve safety and optimise the patient experience, according to company reports.

Looking at its history and recent financial reports, this strategy has helped it grow and establish itself in the healthcare industry.

According to Moody's and Standard & Poor's report on the industry, "UHS maintains one of the strongest balance sheets and is rated among the highest in the hospital services industry. This strong capital position has enabled the company to develop and acquire many new facilities over the past few years."

Fortune 500 ranking

In 2019, UHS was again recognised as one of the World's Most Admired Companies by Fortune. In 2017, UHS was listed in Forbes' inaugural ranking of America's Top 500 Public Companies.

The company's latest financial results show:

• Reported net income of $472.5 million, or $5.23 per diluted share, during the six-month period ended June 30, 2019 (same period in 2018 was $449.9 million, or $4.76 per diluted share)
• Net revenues increased 5.4% to $5.66 billion during the first six months of 2019 (same period in 2018 was $5.37 billion)

What's driving the growth of Universal Health Services?

UHS' core business revolves around two business segments: acute care services and behavioural health services.

While both business units generated revenue growth, the acute care services business was by far the stronger of the two according to company reports.

According to UHS, net revenue from its acute care services jumped 9% year over year on a same-facilities basis, while behavioural health services net revenue increased 2.7% over the prior-year period total.

The acute care services saw higher adjusted admissions of 5% over the prior-year period. At the same time, adjusted patient days increased 5.2% year over year.

On the other hand, admissions on the behavioural health business grew 0.5% over the prior-year period, with adjusted patient days rising 0.3%.

What do analysts say?

According to a recent Reuters survey of analysts tracking UHS, 10 analysts have issued a buy or better rating on the stock, while eight of them have a rating of a hold with the one-year target price suggested by the analysts standing at $159.22.

The Royal Bank of Canada has boosted its price target of UHS to $165 after the hospital operator reported better than expected results. The brokerage presently has an "outperform" rating on the health services provider's stock.

UBS reissued a "buy" rating and set a $151 price target on UHS shares. Bank of America increased their price objective on shares of UHS from $158 to $165 and gave the company a "buy" rating in a recent research report.

Credit Suisse increased their price target on shares of Universal Health Services from $150 to $170 and gave the stock an "outperform" rating in a report on July 29.

However, in its latest report on UHS, Barclays set a $145 price target on the company's shares and gave the stock a "hold" rating.

Stock buyback program

During the release of its most recent financial results, UHS also announced a share buyback scheme. The company said the board of directors have authorised a US$1 billion increase to its stock repurchase program. In 2014, UHS allocated US$1.7 billion for a share buyback scheme.

According to company filings, since the inception of the share buyback program in 2014 through to June 30, 2019, UHS had re-purchased approximately 14.23 million shares at an aggregate cost of approximately $1.68 billion (approximately $118 per share).

The healthcare industry, particularly in the US and the UK, remains a place of rapid change and uncertainty. But given the company's consistent strength, expansion and vision to provide acute care and behavioural health facilities, UHS seems to be well-placed to deliver on its mission.

We consider it a buy.

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