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Should You Retain Universal Health (UHS) Stock In Portfolio?

Published 04/11/2017, 09:43 PM

Universal Health Services, Inc. (NYSE:UHS) stock has gained 9% in last three months, outperforming the Zacks Hospitals industry’s increase of 7.6%. Although the prospects of the medical sector is currently shrouded in uncertainty owing to President Donald Trump’s decision of repealing and replacing Obamacare, Universal Health continues to progress on the back of several positives.

Driven by the company’s inorganic growth initiatives, revenues have been rising continuously. Strategic acquisitions and mergers also contribute to Universal Health’s growth trajectory. During 2016, the company spent $614 million to acquire the adult services division of Cambian Group, PLC in the U.K. The company also purchased Pahrump, NV-based Desert View Hospital as well as various other businesses and real property assets in the same year.

In addition, the company has carved a niche in providing care to underprivileged patients at low costs. Its acute care platform continues to deliver strong underwriting results year after year. Net revenue from acute care hospitals, outpatient facilities and commercial health insurer, accounted for 52% of the company’s consolidated net revenue during 2016, up 100 basis points (bps) year over year.

However, the company’s high debt level raises concerns. At the end of 2016, Universal Health’s long-term debt increased 20% over 2015 to $4 billion. This led to a deterioration of 300 bps year over year in debt-to-capital ratio to 48%.

Another area of concern for the company is the continuous increase in its operating expenses since 2013. In the year 2016, Universal Health witnessed 9% year-over-year increase in operating expenses of $8.5 billion, which accounted for 86.9% of net revenues. The company needs to undertake effective cost management to stop expenses from draining margin.

Also, the stock seems to be overvalued from certain aspects. Its Price to Cash Flow (PCF) ratio of 11.4 is significantly higher than the industry level of 5.6. Its Price to Sales (PS) ratio of 1.12 is above that industry average of 0.76.

Zacks Rank and Stocks to Consider:

Universal Health presently has a Zacks Rank #3 (Hold).

Some better-ranked stocks from the same space areUnitedHealth Group, Inc. (NYSE:UNH) , Inogen Inc. (NASDAQ:INGN) and Infinity Pharmaceuticals, Inc. (NASDAQ:INFI) . While Inogen and Infinity sport a Zacks Rank #1 (Strong Buy), UnitedHealth holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Inogen posted positive surprises in three of the last four quarters with an average positive surprise of 49.08%.

Infinity delivered positive surprises in the trailing four quarters with an average beat of 28.38%.

UnitedHealth delivered positive surprises in last four quarters with an average beat of 3.80%.

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Inogen, Inc (INGN): Free Stock Analysis Report

Infinity Pharmaceuticals, Inc. (INFI): Free Stock Analysis Report

UnitedHealth Group Incorporated (UNH): Free Stock Analysis Report

Universal Health Services, Inc. (UHS): Free Stock Analysis Report

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