Universal Health Services (UHS)

Hospital management company Universal Health Services (NYSE:UHS) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 6.7% year on year to $4.1 billion. Its GAAP profit of $4.80 per share was 8.9% above analysts’ consensus estimates.

Company Overview

With a network spanning 39 states and three countries, Universal Health Services (NYSE:UHS) operates acute care hospitals and behavioral health facilities across the United States, United Kingdom, and Puerto Rico.

Hospital chains operate scale-driven businesses that rely on patient volumes, efficient operations, and favorable payer contracts to drive revenue and profitability. These organizations benefit from the essential nature of their services, which ensures consistent demand, particularly as populations age and chronic diseases become more prevalent. However, profitability can be pressured by rising labor costs, regulatory requirements, and the challenges of balancing care quality with cost efficiency. Dependence on government and private insurance reimbursements also introduces financial uncertainty. Looking ahead, hospital chains stand to benefit from tailwinds such as increasing healthcare utilization driven by an aging population that generally has higher incidents of disease. AI can also be a tailwind in areas such as predictive analytics for more personalized treatment and efficiency (intake, staffing, resourcing allocation). However, the sector faces potential headwinds such as labor shortages that could push up wages as well as substantial investments needs for digital infrastructure to support telehealth and electronic health records. Regulatory scrutiny, and reimbursement cuts are also looming topics that could further strain margins.

Universal Health Services competes with other major healthcare facility operators including HCA Healthcare (NYSE:HCA), Tenet Healthcare (NYSE:THC), Community Health Systems (NYSE:CYH), and Acadia Healthcare (NASDAQ:ACHC).

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 $16.08 billion in revenue over the past 12 months, Universal Health Services 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 can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Universal Health Services’s sales grew at a mediocre 7.1% compounded annual growth rate over the last five years. This was below our standard for the healthcare sector and is a rough starting point for our analysis.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Universal Health Services’s annualized revenue growth of 8.9% over the last two years is above its five-year trend, suggesting some bright spots.

Universal Health Services also reports same-store sales, which show how much revenue its established locations generate. Over the last two years, Universal Health Services’s same-store sales averaged 4.3% year-on-year growth. Because this number is lower than its revenue growth, we can see the opening of new locations is boosting the company’s top-line performance.

This quarter, Universal Health Services’s revenue grew by 6.7% year on year to $4.1 billion, missing Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 8% over the next 12 months, similar to its two-year rate. This projection is particularly healthy for a company of its scale and indicates the market is forecasting success for its products and services.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Universal Health Services was profitable over the last five years but held back by its large cost base. Its average operating margin of 9.9% was weak for a healthcare business.

Looking at the trend in its profitability, Universal Health Services’s operating margin decreased by 1.2 percentage points over the last five years, but it rose by 3.1 percentage points on a two-year basis. Still, shareholders will want to see Universal Health Services become more profitable in the future.

This quarter, Universal Health Services generated an operating profit margin of 11.1%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Universal Health Services’s EPS grew at an astounding 16.8% compounded annual growth rate over the last five years, higher than its 7.1% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

We can take a deeper look into Universal Health Services’s earnings to better understand the drivers of its performance. A five-year view shows that Universal Health Services has repurchased its stock, shrinking its share count by 24.9%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

In Q1, Universal Health Services reported EPS at $4.80, up from $3.82 in the same quarter last year. This print beat analysts’ estimates by 8.9%. Over the next 12 months, Wall Street expects Universal Health Services’s full-year EPS of $17.82 to grow 9.3%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Universal Health Services 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 4.9%, subpar for a healthcare business.

Taking a step back, we can see that Universal Health Services’s margin dropped by 3.1 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its relatively low cash conversion. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business.

Universal Health Services’s free cash flow clocked in at $121 million in Q1, equivalent to a 3% margin. The company’s cash profitability regressed as it was 1.9 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

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).

Universal Health Services’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 10.9%, 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. Uneventfully, Universal Health Services’s ROIC has stayed the same over the last few years. Given the company’s underwhelming financial performance in other areas, we’d like to see its returns improve before recommending the stock.

Universal Health Services reported $126.8 million of cash and $5.09 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.34 billion of EBITDA over the last 12 months, we view Universal Health Services’s 2.1× net-debt-to-EBITDA ratio as safe. We also see its $91.79 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Universal Health Services beat analysts’ EPS and EBITDA expectations this quarter. On the other hand, its revenue slightly missed due to softer-than-anticipated same-store sales. Overall, this was a weaker quarter. The stock traded down 3.3% to $167.50 immediately after reporting.

Updated: May 21, 2025 at 11:59 PM EDT

Before investing in or passing on Universal Health Services, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

When it comes to Universal Health Services’s business quality, there are some positives, but it ultimately falls short. Although its revenue growth was mediocre over the last five years, its spectacular EPS growth over the last five years shows its profits are trickling down to shareholders. Be wary, however, as Universal Health Services’s cash profitability fell over the last five years.

Universal Health Services’s P/E ratio based on the next 12 months is 9.6x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $224.03 on the company (compared to the current share price of $190.15).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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