Universal Health Services offers health care and health prevention solutions across the US. Established in 1979, the company has expanded significantly by acquiring 4-5 hospitals within 2 years. It works in close cooperation with many dozens of health care institutions.
UHS is the largest and the most well-known health organization in the USA. It operates acute care hospitals, behavioral healthcare facilities and ambulant treatment. It is considered a well-capitalized company with more than 60.000 employers that is constantly seeking further acquisition possibilities.
| 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| Revenue | 10772 | 11378 | 11559 | 12642 | 13399 |
| ROE | 15,6% | 15,35% | 16,7% | 19,37% | 11,25% |
| EBITDA (m USD) | 1680 | 1804 | 1867 | 1911 | 1643 |
| EBITDA margin% | 15,6% | 15,86% | 16,15% | 15,12% | 12,26% |
| Dividend (USD) | 0,4 | 0,6 | 0,2 | 0,8 | 0,8 |
| Dividend yield % | 0,344% | 0,416% | 0,145% | 0,606% | 0,568% |
From 2018 the company has generated a significant revenue enhancement, it produces 11-13 B USD revenue per annum. With an increasing EBITDA, its EBITDA margin is stable: 15-16%. This is not expected to change in the coming years. Meanwhile its return on equity has also increased from 15% to 19%, however there was a drop last year. Being a specialist on its field, the company has a stable operation.
UHS has an increasing dividend but the dividend yield is very low, 0,4%-0,6% per annum. Althought it could pay out much more dividend from its profit, the company has chosen to pay more attention to stock buybacks.
As the company's D/E rate is growing in the last five years and the dividend to FCFE ratio is below 80%, we are going to use FCFF analysis.
| 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|
| D/E | 1,075 | 1,105 | 1,119 | 1,132 | 1,337 |
| Div/FCFE | -0,01 | 0,0009 | 0,0002 | 0,0014 | 0,001 |
Our calculation is based on the yield of an US 10-year government bond (4,4%) as risk free return and the average equity risk premium (4,4%) in the US market during the last 80 years. The cost of debt comes from the company’s AAA bond rating. Using these data we get 7,17% of WACC. We expect that the company’s EBIT will grow by 3,17% in the next 5 years and will creep back to 2% after the 5th year. The return of invested capital is 7,96%.
As the earning before interest and taxes has been increasing by 3,17%, so do FCFF values.
Discounting the FCFF figures with the weighted average cost os capital (WACC) we recieve that the value of the company is 18232,9 m USD. This means 181,25 USD/share, calculated with 63,38m shares and without loans. Using our margin of safety methodology, we get a 119,62 USD target price.
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023E | 2024E | 2025E | 2026E | 2027E | TV | DCFV | V | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EBIT(1-t) | 895,2 | 925,56 | 1031,77 | 1031,78 | 758,66 | 1262,85 | 1302,96 | 1344,33 | 1387,02 | 1431,06 | |||
| FCFF | 538,13 | 556,37 | 620,227 | 620,22 | 456,04 | 759,13 | 783,23 | 808,108 | 833,76 | 860,24 | 1092,95 | ||
| DCF | 708,33 | 681,91 | 656,48 | 632 | 608,43 | 14945,75 | 18232,9 | 11488,12 | |||||
| Pe= | 181,2578 |
At the time of this publication the share price is 138,38 USD which is higher by 15% than our target price.
The current price is 24% lower than the fair price but a bit higher than our proposed price. Therefore our suggestion is to accumulate at this price and put this stock to the check list.
| 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| ROIC | 8,37% | 8,35% | 8,95% | 8,48% | 5,9% |
| D/E | 1,075 | 1,105 | 1,119 | 1,132 | 1,337 |
| P/BV | 2,027 | 2,333 | 1,872 | 1,82 | 1,664 |
| Dividend | 0,4 | 0,6 | 0,2 | 0,8 | 0,8 |
| Dividend payout ratio | -0,96 | 0,083 | 0,017 | 0,12 | 0,075 |
| FCFE/shares outst | -0,415 | 7,19 | 11,78 | 6,62 | 10,64 |
| Cash to Stockhlds to FCFE | -6,92 | 1,21 | 0,42 | 0,595 | 2,72 |
The company’s return on invested capital (8-9%) is not much higher than the weighted average of cost of capital (WACC=7,17%), so the company is considered a value creator. The D/E ratio is stable and is increasing slowly but surely. The price to book value is very low (around 1,6-2), and the company has enough capital, which means that it has no liquidity risk.
It pays out a tiny dividend. Although a 7-10 USD dividend payout would be possible every year, the company keeps its dividend below 1 USD instead, and buys back its stocks.
Its shares outstanding have dropped from 96m to 63,4m, it bought back 34% of its stocks in the last five years. So the real value of this company is not the dividend itself but the share repurchase activity: more and more percentage of the FCFE is paid back to stockholders with its stock repurchase policy.
According to current share prices and other data:
| Stock | Price | Shouts | NI | P/E | BV/sh | P/BV | Revenue | P/Sales | Ebitda | EV/Ebitda |
|---|---|---|---|---|---|---|---|---|---|---|
| Encompas | 66,06 | 100,24 | 334,2 | 19,81405 | 14,72 | 4,487772 | 4570 | 1,448983 | 952,5 | 6,952078 |
| Tenet | 67,73 | 101,55 | 499 | 13,78353 | 13,23 | 5,119426 | 20110 | 0,342018 | 3690 | 1,863952 |
| Acadia | 72,98 | 92,22 | 270,54 | 24,87697 | 32,05 | 2,277067 | 2780 | 2,420941 | 596,5 | 11,28284 |
| EnSign | 108,53 | 56,45 | 240,5 | 25,47409 | 24,9 | 4,358635 | 3390 | 1,807233 | 368,6 | 16,62105 |
| Select Me | 23,6 | 128,21 | 196,2 | 15,42179 | 9,8 | 2,408163 | 6490 | 0,466218 | 681,2 | 4,441803 |
| UNH | 126,61 | 70,07 | 675 | 13,14306 | 83,74 | 1,511942 | 13399 | 0,662106 | 1643 | 5,399612 |
| Avg. | 19,87409 | 3,730212 | 1,297079 | 8,232345 | ||||||
| Pe= | 191,4515 | 312,368 | 248,0313 | 193,0319 |
Based on the relative analysis the stock is undervalued.
According to our calculations, the value of the United Health Services is between 191-248 USD, except price to book value evaluation where we got 312 USD price. These prices are higher than the current price, so the stock is undervalued.
According to our analysis, the Universal Health Services (UHS) has increasing its revenue, its ROIC and EBITDA margin are stable, around 15%. Its dividend is not significant, it could pay much more but the company prefers to buy own shares in big stakes instead. This stock repurchase program offers a value to its stockholders on yearly basis.
Its leverage is low, this is a well capitalized company which doesn’t run liquidity risk.
According to FCFF analysis 181,25 USD is the fair price. Using our margin of safety, our target price is 119,62 USD. This price is well below the prices of the relative analysis, so the company is undervalued compared to its competitors. We suggest accumulation at the current price and our recommendation is buying at the price of 120 USD.
