UHS Stock Study (8-29-23)

Posted by Mark on November 10, 2023 at 06:36 | Last modified: August 29, 2023 10:17

I recently did a stock study on Universal Health Services Inc. (UHS) with a closing price of $133.01.

M* writes:

     > Universal Health Services Inc owns and operates acute care hospitals,
     > behavior health centers, surgical hospitals, ambulatory surgery
     > centers, and radiation oncology centers. The firm operates in two key
     > segments: Acute Care Hospital Services and Behavioral Health Services.
     > The Acute Care Hospital Services segment includes the firm’s acute
     > care hospitals, surgical hospitals, and surgery and oncology centers.

Over the past decade, this large-size company has grown sales and earnings at annualized rates of 6.5% and 8.8%, respectively. Lines are mostly up, straight, and parallel except for an EPS decline in ’22. PTPM leads peer and industry averages despite trending down from 11.9% in ’13 to 6.5% in ’22 with a last-5-year mean of 9.3%.

Also over the past decade, ROE leads peer and industry averages despite trending down from 16.2% in ’13 to 11.0% in ’22 with a last-5-year mean of 14.0%. Debt-to-Capital is much lower than peer and industry averages, ranging from 39.9% in ’20 to 50.5% in ’13 with a last-5-year mean of 43.3%.

Interest Coverage is 6.1 and Quick Ratio is 1.1. Value Line gives a B+ rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 5.2% YOY and 5.1% per year for ’23 and ’22-’24, respectively (based on 15 analysts).
• YF projects YOY 6.1% and 5.2% for ’23 and ’24, respectively (13 analysts).
• Zacks projects YOY 5.9% and 4.2% for ’23 and ’24, respectively (6).
• Value Line projects 5.4% per year for ’22-’27.
• CFRA projects 5.8% YOY and 5.3% per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year annualized ACE of 5.9%.

I am forecasting below the range at 4.0% per year.

With regard to EPS growth:

• CNN Business projects 2.8% YOY and 7.5% per year for ’23 and ’22-’24, respectively (based on 15 analysts), along with 5-year annualized growth of 9.2%.
• MarketWatch projects 8.5% and 9.5% per year for ’22-’24 and ’22-’25, respectively (18 analysts).
• Nasdaq.com projects 10.5% YOY and 9.5% per year for ’23-’25 and ’23-’26 [7, 4, and 1 analyst(s) for ’23, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 10.8%.
• YF projects YOY 3.1% and 13.4% for ’23 and ’24, respectively (12), along with 5-year annualized growth of 10.4%.
• Zacks projects YOY 4.0% and 12.9% for ’23 and ’24, respectively (7), along with 5-year annualized growth of 9.8%.
• Value Line projects 9.3% per year from ’22-’27.
• CFRA projects 2.9% YOY and 7.4% per year for ’23 and ’22-’24, respectively, along with a 3-year CAGR of 11.0%.

I am forecasting below the long-term-estimate range (mean of five: 9.9%) at 7.0% per year. I will use ’22 EPS of $9.14/share as the initial value rather than 2023 Q2 EPS of $9.63 (annualized).

My Forecast High P/E is 13.0. Over the past decade, high P/E ranges from 13.5 in ’20 to 22.0 in ’15 with a last-5-year mean of 15.8. The last-5-year-mean average P/E is 12.9. I am forecasting just above the latter and below the entire high P/E range.

My Forecast Low P/E is 9.0. Over the past decade, low P/E ranges from 5.9 in ’20 (possibly a downside outlier) to 15.0 in ’15 with a last-5-year mean of 10.1. I am forecasting near the bottom of the range (only ’20 is lower).

My Low Stock Price Forecast (LSPF) of $82.30 is default based on $9.14/share initial value. This is 38.1% less than the previous close and 20 cents off the 52-week low.

Over the past decade, Payout Ratio ranges from 1.8% in ’20 (downside outlier?) to 8.8% in ’22 with a last-5-year mean of 5.7%. I am forecasting near the bottom of the range at 3.0% (only ’20 is lower).

These inputs land UHS in the HOLD zone with a U/D ratio of 0.7. Total Annualized Return (TAR) is 5.1%.

PAR (using Forecast Average—not High—P/E) is 1.7%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR but that, too, is less than the risk-free rate.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 37 studies (my study and 16 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 6.0%, 8.0%, 16.1, 11.0, and 5.5%. I am lower across the board. Value Line’s projected average annual P/E of 15.0 is higher than MS (13.6) and mine (11.0).

MS high / low EPS are $14.06 / $9.63 vs. my $12.82 / $9.14 (per share). High EPS are both lower than Value Line at $15.40.

MS LSPF of $67.10 implies a Forecast Low P/E of 9.8, which is less than the above-stated 11.0. MS LSPF is 10.8% less than the default $9.63/share * 11.0 = $105.93, which results in more conservative zoning. MS LSPF remains 14.8% above mine.

My TAR (over 15.0% preferred) is much less than the 11.9% from MS.

Despite the small MS sample size, MOS backing the current study seems robust.

I track a few different valuation metrics. PEG is 1.3 (fairly valued) and 1.8 (slightly overvalued) per Zacks and my projected P/E, respectively. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is slightly overvalued at 1.1. Kim Butcher’s “quick and dirty DCF” prices the stock at 9.0 * [$15.40 – ($2.00 + $11.00)] = $21.60, which seems like NMF. The high CapEx may be causing a problem.

I would look to re-evaluate the stock under $103. With a forecast high price of $166.70, I would estimate TAR to meet my criterion at or below $83.35/share.