Company Information

Universal Health Services owns and operates (through its subsidiaries) acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers.

It offers general and specialty surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services, pharmacy services and/or behavioral health services.

The company employs roughly 80,800 individuals and generated 11.38 billion in revenue in the past 12 months.

Executive Summary

Investment Thesis: Despite stalling hospital revenue recovery, decreased hospital sentiment, and increased political overhang, we believe that UHS overcomes these risks because of the following reasons

• The expected 6.8% 5-year CAGR for the acute care market

• UHS strong capital position

• Accretive acquisitions

One thing that is driving discrepancy in value is Universal’s credit rating. UHS currently has a Ba1 rating, but it seems that the market is not recognizing that UHS is 50% less levered than the industry. Secondly, investors are too concerned with overall declining hospital revenues without paying attention to Universal’s involvement in the acute sector which has has remained resilient throughout COVID and positioned for considerable growth going forward. Lastly, UHS has an excellent M&A track record and will be able to by in at low valuations due to COVID.

Investment Merits: Over the years, acquisitions have played a key role in UHS’s growth trajectory, by adding facilities, bed and hospital to its business.

In 2018 and 2019, the company spent a total of $110 million and $8 million on acquisitions. We believe that the company will continue to acquire going forward. Notable transactions include: Cygnet Health Care Limited, Psychiatric Solutions. UHS will continue to  make acquisitions that will help it expand its domestic and international presence along with positioning it better to weather the regulatory uncertainty in the healthcare sector.

During the last earnings call, CEO Marc Miller explained how Universal will also look to develop alliance and partnerships with other diversified  hospital and healthcare facilities. This will allow Universal to benefit from economies of scale by improving bargaining power over insurance providers.

Lastly, hospital valuations are low due to the pandemic. We have seen PE extend their involvement in the healthcare services space. M&A has become a major value driver in healthcare services and UHS is well positioned to make accretive acquisitions through its low cost of acquisition and synergistic capabilities.

Investment Risks: UHS has recently been involved with legal proceedings, which not only affects its brand image but also increases the financial burden on the organization. Any unfavorable outcome from various investigations could lead to civil and criminal damages and is likely to affect the company's brand image.

The US Department of Justice (DOJ) alleged that UHS incorrectly billed Medicaid and Medicare programs for its patients. In July 2019, the company agreed to pay US$127 million to settle the allegations against its behavioral health facilities. Although DOJ dropped the criminal investigation, the agreement was subject to regulatory approvals and has only been closed in July 2020.

Increased political overhang causes market fears of Biden’s Public Option & lowering Medicare eligibility age proposals – RBG’s death may reanimate Democratic momentum, donations and turnout in both the Presidential and Senate races.

Recommendation:

We recommend the investment club invest around $1500, or roughly 14 shares of UHS at its current share price.