Universal Health Services: Stock Has Lots Of Upside Runway (NYSE:UHS)

Universal Health Services (NYSE:UHS) looks positive for the long term, with a low valuation and strong expected future growth (consensus). The global hospital services market is expected to grow at about 6.4% annually to reach over $21 billion by 2032. This should provide a nice tailwind to help drive growth for Universal Health Services. The stock is in a positive uptrend, which should continue if conditions remain favorable for the company.

Universal Health Services Business Background

Universal Health Services owns and operates acute care hospitals, outpatient, and behavioral healthcare facilities. UHS’s hospitals cover a variety of services such as emergency room care, internal medicine, general/specialty surgery, oncology, radiology, obstetrics, pediatrics, diagnostics, cardiac care, behavioral health, and pharmacy services. UHS also provides commercial health insurance services and a variety of related hospital management services.

UHS operates under two reportable segments: Acute Care Hospital Services and Behavioral Health Services. The Acute Care Hospital Services segment comprises about 87% of total revenue, while Behavioral Health comprises the remaining 13% of total revenue. The company’s inpatient revenue from both segments comprises about 64% of total revenue, while outpatient services comprise 36%.

As of the end of Q2 2024, UHS operated 359 inpatient facilities and 48 outpatient and other facilities. These facilities are located in 39 states, Washington D.C., Puerto Rico, and the United Kingdom. The United Kingdom has 146 of UHS’s facilities, while 261 are located in the United States (including the 3 facilities in Puerto Rico).

Universal Health Services: Growth Catalysts

UHS has macro tailwinds that are likely to drive long-term growth. I mentioned that the global hospital services market is expected to grow at about 6.4% annually to 2032. If we break that down further, the North America hospital services market is expected to grow at about 6% during the same period. The Europe hospital services market is expected to grow at 5.6% during that period.

Some of the factors that are driving this expected growth are: an aging population, the expansion of health insurance coverage, increasing prevalence of chronic diseases, and increasing disposable income. However, it is important to note that the expected growth can be partially offset by these factors: limited access, high costs, shortage of skilled workers, and changing patient needs.

UHS has efforts underway to increase capacity to accommodate further growth in the Acute Care segment. UHS has plans for 12 new freestanding emergency departments to add to its 27 existing ones. Universal Health has a 150-bed acute care hospital under construction in Las Vegas. UHS has a 136-bed hospital in Washington D.C. expected to open in the spring of 2025. The company also has a 150-bed facility in Palm Beach Gardens, Florida expected to open in spring of 2026.

UHS is also expanding its Behavioral Health segment. UHS recently opened a 128-bed behavioral hospital in Madera, California. The company is developing a 96-bed behavioral hospital in a joint venture with Trinity Health Michigan in West Michigan. The West Michigan facility is expected to open in 2025.

Universal Health achieved margin increases in Q2 2024. The gross margin increased from 39% in Q2 2023 to 42.6% in Q2 2024. The operating income margin increased from 7.9% in Q2 2023 up to 11.2% in Q2 2024. The net income margin increased from 4.8% in Q2 2023 to 7.4% in Q2 2024. UHS stated that it expects to sustain this margin recovery for the next several periods. This should drive profitability and earnings growth.

As a result of favorable operating trends, UHS increased EPS guidance by 17% for 2024 to be $15.80 per diluted share, as compared to the previous estimate of $13.50 per diluted share.

UHS increased its stock repurchase program by $1 billion, bringing the current authorization to $1.228 billion. This should help shareholders by reducing the total share count, which makes existing shares more valuable.

Universal Health’s efforts to expand capacity while increasing margins should help drive the stock higher as its industry continues to grow.

Valuation

Universal Health Services is trading with an attractive valuation. As a profitable company, the PE ratio is a good valuation measure for UHS. UHS is trading at 13x analysts’ consensus expected EPS of $17.85 for 2025. This is lower than the forward PE of 17x for the Medical Care Facilities industry.

I also think that the PEG ratio is an important valuation metric to consider, since UHS is a strong growth company. The PEG ratio takes multiple years of projected earnings growth rates into the equation. UHS is trading with an attractive PEG ratio of only 0.62. This is lower than the Medical Care Facilities industry’s PEG of 1.56. United Health’s PEG ratio is based on expected annual 3 to 5 year EPS growth of 23.5%.

I would actually be pleased with UHS to trade with a PEG between one and two. The growth stocks that I cover tend to perform well at that level. So, when I see a strong profitable growth stock trading with a PEG below one, that just leaves more upside potential.

United Health’s strong expected earnings growth is driven by the company’s strong ROE of about 15%. It is also driven by the margin improvements that UHS has been achieving as operating trends have been favorable. As a result of these conditions, UHS has a good chance of achieving consensus EPS estimates.

UHS’s low valuation leaves ample room for the stock to run higher as the company continues its growth.

Technical Perspective

The daily stock chart above shows UHS in a strong uptrend in 2024. Every dip was bought up, and the stock made new highs. It looks like the most recent dip is also being bought up. The RSI indicator dipped from an overbought level down to the 50 level. Since the stock bounced higher from the 50 level, UHS remains in bullish technical territory.

The blue MACD line did drop below the red signal line, which typically indicates a possible change in trend from positive to negative. However, the histogram bars turned from red to pink, indicating that the negative momentum is waning. Investors should watch for the blue line to cross above the red signal line, and the histogram bars turn back to green. This would confirm a return to a positive trend.

The Risks for UHS

UHS derives a high concentration of revenue from its facilities in three states: California, Nevada, and Texas. This makes the company highly sensitive to changes in these regions. These potential changes include: regulations, competition, economic, legislative, and environmental. One or more of these factors could negatively impact UHS if they were unfavorable to the company.

UHS obtains a significant portion of revenue from third-party payers such as Medicare and Medicaid. Changes in these programs could have a negative impact on reimbursement rates.

United Health is required to treat patients with emergency medical conditions regardless of their ability to pay. If the amount of patients that were unable to pay increased significantly, it could have a negative impact on the company’s revenue and earnings.

United Health Services Long-Term Outlook

Overall, UHS has a positive outlook with margin increases, strong earnings growth, positive stock price momentum, and a low valuation. The company is poised to benefit from the expected long-term growth for the hospital services market. United Health has been increasing capacity with more facilities to accommodate long-term market growth.

The low valuation level leaves room for more PE expansion. This combined with the company’s strong double-digit earnings growth rate is likely to drive the stock to outperform the broader market over the next year and possibly for a longer period of time.