Surgery Partners (SGRY)

Healthcare company Surgery Partners (NASDAQ:SGRY) reported Q2 CY2025 results exceeding the market’s revenue expectations, with sales up 8.4% year on year to $826.2 million. The company expects the full year’s revenue to be around $3.38 billion, close to analysts’ estimates. Its non-GAAP profit of $0.17 per share was 25.8% above analysts’ consensus estimates.

Company Overview

With more than 180 locations across 33 states serving as alternatives to traditional hospital settings, Surgery Partners (NASDAQ:SGRY) operates a national network of outpatient surgical facilities including ambulatory surgery centers and short-stay surgical hospitals.

The outpatient and specialty care industry delivers targeted medical services in non-hospital settings that are often cost-effective compared to inpatient alternatives. This means that they are more desired as rising healthcare costs and ways to combat them become more and more top-of-mind. Outpatient and specialty care providers boast revenue streams that are stable due to the recurring nature of treatment for chronic conditions and long-term patient relationships. However, their reliance on government reimbursement programs like Medicare means stroke-of-the-pen risk. Additionally, scaling a network of facilities can be capital-intensive with uneven return profiles amid competition from integrated healthcare systems. Looking ahead, the industry is positioned to grow as demand for outpatient services expands, driven by aging populations, a rising prevalence of chronic diseases, and a shift toward value-based care models. Tailwinds include advancements in medical technology that support more complex procedures in outpatient settings and the increasing focus on preventive care, which can be aided by data and AI. However, headwinds such as reimbursement rate cuts, labor shortages, and the financial strain of digitization may temper growth.

Surgery Partners' main competitors include other ambulatory surgery center operators such as United Surgical Partners International (owned by Tenet Healthcare, NYSE:THC), AmSurg (part of Envision Healthcare), HCA Healthcare (NYSE:HCA), and SCA Health (owned by Optum, a UnitedHealth Group company, NYSE:UNH).

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $3.24 billion in revenue over the past 12 months, Surgery Partners has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Surgery Partners’s sales grew at a solid 12.6% compounded annual growth rate over the last five years. Its growth beat the average healthcare company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Surgery Partners’s annualized revenue growth of 10.3% over the last two years is below its five-year trend, but we still think the results were respectable.

Surgery Partners also reports its number of units sold. Over the last two years, Surgery Partners’s units sold averaged 3.1% year-on-year growth. Because this number is lower than its revenue growth, we can see the company benefited from price increases.

This quarter, Surgery Partners reported year-on-year revenue growth of 8.4%, and its $826.2 million of revenue exceeded Wall Street’s estimates by 1.2%.

Looking ahead, sell-side analysts expect revenue to grow 9.1% over the next 12 months, similar to its two-year rate. Despite the slowdown, this projection is admirable and suggests the market is forecasting success for its products and services.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Surgery Partners’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same, averaging 12.2% over the last five years. This profitability was higher than the broader healthcare sector, showing it did a decent job managing its expenses.

Looking at the trend in its profitability, Surgery Partners’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q2, Surgery Partners generated an operating margin profit margin of 13.5%, up 2.4 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Surgery Partners’s full-year EPS flipped from negative to positive over the last five years. This is encouraging and shows it’s at a critical moment in its life.

In Q2, Surgery Partners reported adjusted EPS at $0.17, down from $0.21 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Surgery Partners’s full-year EPS of $0.84 to grow 13.5%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Surgery Partners has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.3%, subpar for a healthcare business.

Taking a step back, an encouraging sign is that Surgery Partners’s margin expanded by 3.6 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Surgery Partners’s free cash flow clocked in at $57.9 million in Q2, equivalent to a 7% margin. This cash profitability was in line with the comparable period last year and above its five-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Surgery Partners’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 7.8%, slightly better than typical healthcare business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Surgery Partners’s ROIC decreased by 1 percentage points annually over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Surgery Partners’s $3.58 billion of debt exceeds the $250.1 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $525.3 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Surgery Partners could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Surgery Partners can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We were impressed by how significantly Surgery Partners blew past analysts’ EPS expectations this quarter. We were also happy its revenue narrowly outperformed Wall Street’s estimates. Full-year revenue guidance was reaffirmed, showing that the business is on track. Overall, this print had some key positives. The stock traded up 2.6% to $22.80 immediately after reporting.

Updated: November 8, 2025 at 11:07 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Surgery Partners.

Aside from its balance sheet, Surgery Partners is a pretty decent company. First off, its revenue growth was solid over the last five years. On top of that, Surgery Partners’s astounding EPS growth over the last five years shows its profits are trickling down to shareholders, and its rising cash profitability gives it more optionality.

Surgery Partners’s P/E ratio based on the next 12 months is 23.7x. All that said, we’d hold off for now because its balance sheet concerns us. If you’re interested in buying the stock, wait until it generates sufficient cash flows or raises some money.

Wall Street analysts have a consensus one-year price target of $30.82 on the company (compared to the current share price of $21.93).