New Hospitals And Tech Investments Expected To Improve Efficiency And Patient Care

Key Takeaways

• Opening new facilities and tech investments are expected to drive growth and enhance operational efficiency, benefiting revenue and net margins.
  
• Share repurchases and wage stabilization are likely to boost earnings per share and contribute to margin expansion and profitability.
  
• Uncertainty in Medicaid policies and the expansion of behavioral health services pose risks to revenue stability and margin growth.

Catalysts

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

• Opening new facilities such as West Henderson Hospital and Cedar Hill Medical Center is expected to drive growth and become EBITDA positive in 2025, boosting UHS's revenue and earnings.
  
• Strong volume growth, robust pricing strategies, and effective expense control are expected to drive core EBITDA growth in both the acute care and behavioral segments, impacting net margins positively.
  
• Accelerated investments in technology for patient care improvements, including electronic health records and patient monitoring, in behavioral hospitals are anticipated to enhance operational efficiency and patient outcomes, possibly improving net margins.
  
• Continued share repurchase programs, which have reduced outstanding shares significantly since 2019, are expected to boost earnings per share (EPS) by reducing share count.
  
• Stabilization and improvement in wage pressures after the COVID years, alongside prudent cost management, are likely to contribute to margin expansion and overall profitability.

Universal Health Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Universal Health Services's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 7.4% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $23.34) by about March 2028, up from $1.1 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 11.6x on those 2028 earnings, up from 10.0x today. This future PE is lower than the current PE for the US Healthcare industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 2.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.47%, as per the Simply Wall St company report.

Universal Health Services Future Earnings Per Share Growth

Risks

• There is uncertainty in the political environment regarding Medicaid reimbursement changes, which could negatively impact revenue projections.
  
• A $79 million increase in reserves for self-insured liability claims was recorded, indicating potential volatility in future net margins if claims continue to rise.
  
• There is a projected decrease in Medicaid supplemental payments for 2025, which could lower expected revenue and earnings growth.
  
• The expansion of their behavioral health services may result in operational or execution risks, impacting revenue and margins if the demand doesn’t meet expectations.
  
• The wide guidance range for 2025 is due to uncertainties around government reimbursements, indicating potential instability in revenue and earnings.

Valuation

• The analysts have a consensus price target of $229.881 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 $176.21.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $19.1 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 6.5%.
• Given the current share price of $176.34, the analyst price target of $229.88 is 23.3% 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.