New Las Vegas And Washington Centers Will Expand Healthcare Access

Key Takeaways

• Strategic facility expansions and effective expense controls signal potential revenue growth and improved net margins for Universal Health Services.
  
• Share buybacks and Medicaid approvals emphasize management's focus on boosting earnings per share and sustaining cash flow growth.
  
• Reliance on Medicaid and healthcare labor competition bring financial uncertainty, affecting net revenues, wage costs, liquidity, and revenue growth potential.

Catalysts

Through its subsidiaries, owns and operates acute care hospitals, and outpatient and behavioral health care facilities.

• The opening of new facilities like West Henderson Hospital in Las Vegas and Cedar Hill Regional Medical Center in Washington, D.C., both showing strong demand and positive early financial performance, is expected to drive future revenue growth.
  
• Management's confidence in its solid behavioral and acute care revenues along with effective expense controls suggests potential improvement in net margins.
  
• Continued share buybacks, with over 30.3 million shares repurchased since January 2019, indicate management's commitment to enhancing earnings per share (EPS).
  
• Expectations of continued Medicaid supplemental payments, once approved, particularly in Nevada, may boost future earnings and cash flows.
  
• Improved managed care pricing, particularly within managed Medicaid, could sustain revenue per adjusted day growth in the behavioral health segment, enhancing overall revenue and margins.

Universal Health Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Universal Health Services's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 7.5% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $23.62) by about May 2028, up from $1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, up from 10.0x today. This future PE is lower than the current PE for the US Healthcare industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 2.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.25%, as per the Simply Wall St company report.

Universal Health Services Future Earnings Per Share Growth

Risks

• The reliance on Medicaid supplemental payments presents uncertainty, as delays in state approvals and potential future legislative changes could impact net revenues and earnings.
  
• There is tight competition for healthcare labor, which affects staffing levels and could increase wage costs, pressuring operating expenses and profit margins.
  
• Fluctuations due to external factors like weather, which affected patient volumes and revenue growth, introduce variability that could negatively impact revenue and earnings targets.
  
• The delay in receiving Medicaid funds has decreased cash from operating activities, which could affect liquidity and capital expenditure plans.
  
• Increasing capacity in the behavioral health sector may reduce leverage over pricing negotiations with payers, potentially moderating revenue growth.

Valuation

• The analysts have a consensus price target of $223.901 for Universal Health Services based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $280.0, and the most bearish reporting a price target of just $186.41.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $18.8 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 6.3%.
• Given the current share price of $184.16, the analyst price target of $223.9 is 17.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.