Medical Care Facility company Universal Health Services is taking Wall Street by surprise today, falling to $229.92 and marking a -4.1% change compared to the S&P 500, which moved -0.0%.
UHS currently sits within range of its analyst target price of $240.13, which implies that its price may remain stable for the near future.
Surprisingly, analysts give the stock an average rating of buy, which shows that they believe prices could continue to move. Over the last year, Universal Health Services shares have outstripped the S&P 500 by 48.3%, with a price change of 82.1%.
Universal Health Services, Inc., through its subsidiaries, owns and operates acute care hospitals, and outpatient and behavioral health care facilities. The company is categorized within the healthcare sector. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.
Universal Health Services's trailing 12 month P/E ratio is 16.9, based on its trailing EPS of $13.61. The company has a forward P/E ratio of 12.9 according to its forward EPS of $17.85 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2024, the health care sector has an average P/E ratio of 26.11, and the average for the S&P 500 is 29.32.
A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.
When we divide Universal Health Services's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 0.61. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Universal Health Services was $524.74 Million as of its last annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $642.97 Million and they've been growing at an average rate of -5.8%. UHS's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 0.3% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Universal health services's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2.37, but is still below the average P/B ratio of the Health Care sector, which stood at 3.53 as of the second quarter of 2024.
Since it has a Very low P/E ratio, a lower P/B ratio than its sector average, and positive cash flows with a downwards trend, Universal Health Services is likely fairly valued at today's prices. The company has poor growth indicators because of an above average PEG ratio and decent operating margins with a negative growth trend. We hope you enjoyed this overview of UHS's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
