Many of the companies in the health services sector have seen an upswing in their prices lately. As part of the companies who have seen their stock prices rise in recent months, Universal Health Services (NYSE:UHS) presents an interesting case. Universal Health Services is a holding company comprising several subsidiaries. Through its subsidiaries it owns and operates an array of behavioral health centers, acute care hospitals, ambulatory surgery centers, surgical hospitals and radiation oncology centers.
UHS greatly increased the medical facilities under its control in the year 2010-2011. UHS's focus in the period 2011-2012 was on improving its performance. This focus was further continued in the 1Q13.
Source: UHS Financial Statements
As it can be seen from the table above, YoY increase in the revenues of the hospitals providing Acute care averaged out to 15%. The YoY increase in the hospitals providing Behavioral health care averaged out to 7%.
The main competitors of UHS are Community Health Systems Inc. (NYSE:CYH), HCA Holdings Inc. (NYSE:HCA) and Tenet Healthcare Corp. (NYSE:THC). All three of them are major players in the health services sector of United States.
Source: Company Financial Statements
A critical performance indicator for companies in the health sector is the average revenue per occupied bed. As it is evident from the table above, UHS has the highest revenue per occupied bed. This is because of the simple fact that UHS is able to retain its patients for more days than its competitors. The average figure for revenue per occupied bed among the competition is $4564 but UHS is able to obtain the impressive figure of $9579 as its average revenue per occupied bed. One of the main reasons behind this superior performance by UHS is its revenue profile, which has been discussed earlier in the historical analysis section. The business of UHS is divided in the Acute and Behavioral care services mainly. The average length of stay for patients coming into the Acute care hospitals is 4.6 days but the average length of stay for patients coming into the Behavioral care hospitals is 13.4 days. Furthermore, the share of licensed beds and the occupancy rates of the Behavioral care hospitals are much more than those of the Acute care hospitals. This naturally makes the average length of stay at UHS' hospitals increase. This phenomenon is the biggest reason behind the higher average revenue per occupied bed at UHS.
Another metric that is useful in measuring the performance of companies engaged in the health services sector is the EBITDA Margin. UHS' EBITDA Margin of 17.10 is greater than the average competitor margin. This signifies that UHS is able to generate handsome returns from its core operations.
Operationally, UHS is at an advantage against its competitors. This advantage is further extended when we perform the relative valuation of UHS.
The table above shows that the UHS P/E ratio is much lower when compared to that of the industry. This shows the possible undervaluation of the stock. The P/B ratio of UHS is lower than that of the industry, again suggesting a possible undervaluation of this stock. The P/S ratio of UHS, however, shows the overvaluation of the stock when compared to the industrial average but it is the only indicator that is against the stock. The five-year revenue cumulated annual growth rate (OTCPK:CAGR) of UHS is not above the industrial average but it is better than two of its main competitors. This shows that UHS will continue to focus on improving its performance in the years to come.
The risks associated with a company grow along with its expansion. As UHS has increased its scale of operation in the previous years, especially in the 2010-2011 period, the risks associated with it are bound to grow.
One of the foremost risks a company faces is the liquidity/solvency risk. As shown in the above table, the debt-to-equity ratio of UHS is much lower than the industrial average and the average of UHS with its main competitors. This shows that the debt figures at UHS are not so large that servicing them would become difficult for the company. This fact is further supported by the high interest coverage of UHS.
Obamacare and UHS
Obamacare is a federal statute through which the U.S. government plans to reduce the overall cost of healthcare for the average American, especially senior citizens. Effective for discharges beginning from October 1, 2012, hospitals throughout the United States can gain or lose 1% of Medicare funding depending on the fulfillment/non-fulfillment of 20 factors that gauge the quality versus quantity of care provided by the hospitals. What this means is that hospitals with low re-admittance can gain funding and the ones with a high re-admittance can lose funding. UHS can benefit from this opportunity by introducing quality measures that will help reduce the re-admittance of patients, therefore gaining from the Obamacare program.
With improvement in its performance, UHS is an upcoming medical services company. The structure of its hospitals allows UHS to retain its patients for a longer period, therefore utilizing its resources more efficiently. With the market expecting decent growth from this company, the relative valuation signifies its possible undervaluation. The company has a relatively better financial condition to service its debt than its competitors. UHS can further improve its performance by taking advantage of government regulations. With such a positive outlook, I would suggest the investors a buy position for a longer horizon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.