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On Wednesday, Guggenheim initiated coverage on shares of Universal Health Services (NYSE:UHS) with a Buy rating and a price target of $208.00. According to InvestingPro data, the stock is currently trading below its Fair Value, with analyst targets ranging from $186 to $280, reflecting strong upside potential. The company maintains an impressive "GREAT" overall financial health score of 3.42 out of 5. The firm's analysts highlighted the company's position to gain from its strong Acute care hospital footprint, which is expected to lead top-line growth compared to its peers. Additionally, the increased acceptance and demand for behavioral and mental health services are seen as a positive driver for the company.
Universal Health Services is anticipated to have a significant opportunity for margin expansion, with Acute margins excluding Medicaid supplemental payments estimated to be 400 to 600 basis points below levels seen in 2019. The company's current gross profit margin stands at 42.5%, while generating robust revenue growth of 10.8% in the last twelve months. InvestingPro data reveals that eight analysts have recently revised their earnings estimates upward for the upcoming period, suggesting growing confidence in the company's margin improvement trajectory. This suggests room for improvement as volumes grow, particularly given the high margin pull-through from these services. The Behavioral segment is also expected to show a better recovery compared to the Acute segment, with issues mainly arising from volume capture, which is currently 300 basis points below 2019 levels. A reacceleration in volume is believed to aid in margin improvement.
The analysts noted that EBITDA for Universal Health Services is supported by Medicaid supplemental payments, which are expected to contribute a $1 billion benefit for the 2025 estimate, compared to the company's 2025 guidance midpoint of $2.4 billion. Even with a 20% reduction in EBITDA, which would represent a 40% hit to Disproportionate Share Hospital (DSH) payments, Universal Health Services' stock is trading at approximately 8 times earnings. This valuation is slightly above the 5-year range but is considered inexpensive relative to the company's expected mid-single to high-single digit underlying growth rate.
The favorable outlook for Universal Health Services is also backed by the company's balance sheet and cash flow flexibility. Guggenheim's analysis suggests that these financial strengths, combined with the company's strategic positioning in both Acute and Behavioral healthcare services, support a positive view of the stock's future performance. InvestingPro analysis confirms this outlook, highlighting the company's strong free cash flow yield and its ability to sufficiently cover interest payments. With a P/E ratio of 10.6x and a PEG ratio of just 0.15, the stock appears attractively valued relative to its growth prospects. Discover more insights about UHS and access comprehensive analysis of 1,400+ stocks with an InvestingPro subscription.
In other recent news, Universal Health Services has been the focus of several updates. Morgan Stanley (NYSE:MS) initiated coverage on the company with an Equalweight rating and a price target of $200. The firm noted a strong recovery in the company's behavioral segment profitability, although challenges remain in the acute care segment due to increased physician fees. Cantor Fitzgerald maintained a Neutral rating with a price target of $227, highlighting the company's stable bonus structures amidst hiring pressures. Universal Health Services has also set its 2025 executive compensation goals, including performance-based bonuses and equity awards for top executives, aligning their incentives with shareholder interests. CEO Marc D. Miller's bonus target is set at 150% of his base salary, with CFO Steve G. Filton and other executives at 100%. The company continues to maintain a strong balance sheet, with net leverage at 1.9 times, supporting share buybacks. Additionally, the last significant acquisition by Universal Health Services was in 2016, and the company remains open to opportunities if they arise.
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