Research Paper on "Financial Analysis of Universal Health Services Uhs"

Research Paper 10 pages (2635 words) Sources: 2 Style: APA

[EXCERPT] . . . .

Financial Analysis of UHS

UHS is a well-managed, national health care provider. They are the number three operator of health care facilities in the U.S. Their primary strengths lie in their sound management and geographic diversity. They do not, however, have any particular source of competitive advantage. Moreover, they are highly leveraged, which has allowed them to grow profitably but also compromises the company in the long-term in relation to their competitors.

UHS is liquid, despite their debt. Their current ratio and receivable turn are solid if unspectacular. They receive the bulk of their revenues from three customer classes - Medicare, Medicaid and managed care companies.

The company's income statement reveals strong top line profitability but they lag their competitors in terms of bottom line margins. This is due to high operating expenses. These have grown more rapidly than revenues over the past several years, creating a drag on profit growth. One result is that the company has not been able to grow its cash from operations, despite strong increases in capital investments in recent years.

It is recommended that UHS improve its financial performance by focusing on operational efficiency. They need to hold the line on operating expenses, which have grown significantly over the past year. This has bulked up their infrastructure, but they must now focus on growth by infill of their current growing markets. This will allow them to utilize their current infrastructure more efficiently.

Introduction

Universal Health Services (UHS) is a healthcare provider operating in 32 states nationwide. By revenue, they are the 7th largest operator of healthcare facilities. Some of the larger firms, however, are not direct competitors, for example dialysis clinics Fresenius and DaVita. Therefore in its peer group, UHS ranks third behind Community Health Systems and Tenet Healthcare Corporation. By market cap, UHS is the largest firm in the industry.

UHS stock is traded on the New York Stock Exchange. The closing price on November 7, 2008 was $40.80. This represents a price/earnings ratio of 11.05, versus an industry average of 12.46. This price represents a lift from the 52-week bottom, which occurred on October 27th at $36.76. The stock dropped roughly with the market over the fall and its slight rebound has also mirrored market performance. Overall, UHS has a beta of 0.85. Over the past five years ended December 31, 2007, UHS has outperformed its peer group significantly, improving share price 16.56% while the peer group's value has declined. However, UHS significantly underperformed the S&P 500, as that group improved 82.86% over the same period.

Strengths and Weaknesses

Universal Health Services is a well-managed company with good geographic diversity. There are several indicators of the quality of UHS' management. One is that the company has not had any scandals, governance issues or major incidents of negative publicity in recent years. Another indicator is that they have been able to maintain high gross margins at a time when their competitors have not. A third indicator of sound management at UHS is that they have developed a strong system for managing their accounts receivable. These are the core of revenues of UHS and come from a handful of major private and public bodies. Management of these revenues is critical and UHS has an advanced system to perform this function. This dedication to excellence in a staff function indicates a thorough management team that understands the key drivers of its business.

Another example of management strength is the company's management of its capital structure. When it retired a significant portion of its debt in 2005 it also saw a decrease in financial performance. The company then increased debt again in 2006 and performance has recovered. The careful management of the capital structure indicates a management team that understands how to utilize debt to grow their company without compromising long-run profitability.

Geographic diversity is another source of strength in the health care industry. It provides a degree of insulation from regional economic cycles. Additionally, it provides insulation against demographic shifts. Indeed, UHS has a presence in many growing areas, such as southwest Florida, Las Vegas and markets in Texas. This has allowed them to maintain growth despite demographic shifts away from some of their other markets. By operating as far afield as Puerto Rico and Alaska, UHS also gains valuable experience in different operating environments and cultures.

There are a couple of key weaknesses for UHS, however. Their high degree of leverage is a boon to their operations and has allowed them to grow smartly. But it also constricts future opportunities. The company is more highly levered than their competitors and consequently is more exposed to shifts in the economy and interest rates. They also may experience less ability to raise debt in future.

Another weakness is that UHS has no apparent source of sustainable competitive advantage. They are a company that has strong management and conducts its business well. There is little downside risk inherent in UHS' operations. Yet, there is nothing significant to distinguish them from any other major health care provider. In short, they are good at everything but great at nothing. This leaves them exposed to competitive forces, both from the firms larger than they are and from niche players.

Lastly, UHS has a high cost structure. They have very strong gross margins but these do not translate to the bottom line. UHS underperforms its competitors with regard to operating and net margins despite outperforming them on gross margin. This indicates that UHS is not as efficient as they possibly could be.

Financials - Liquidity

UHS has moderate liquidity. Compared to other firms in the sector, UHS has significantly lower than average liquidity. The company's liquidity, however, is in line with the broader industry average. For example, UHS' current ratio is 1.37, compared with a sector average of 3.72 and industry average of 1.47. The quick ratio is 1.37, compared to 3.30 and 1.38 respectively. The company has a poor cash ratio of 0.03.

Over the past couple of years, liquidity has remained stable. The company experienced a deterioration of liquidity in 2005, from which a new liquidity paradigm has emerged. Liquidity prior to 2005 was well above current levels, as measured by the current ratio. The company has experienced relative stability in their debt levels in recent years. Long-term debt to equity was 66.5% on December 31, 2007, an increase over the past couple of years, but lower than levels earlier in the decade. The level was 58.5% a year ago.

Long-term debt levels are high for the sector, but low for the industry. Long-term debt to equity for UHS is 59.72, for the sector 10.17 and for the industry 230.47. The long-term debt is now closer to the level at the end of 2006 after a spike for year-end 2007. The structure of the debt emphasizes the long-term. For example, the current portion of long-term debt is $3.1 million on a total long-term debt of over $1 billion. UHS has a healthy interest coverage of 3.97, which is higher than the sector average (1.02) but lower than the industry average (5.63).

Long-term debt to net assets is 27.9% as of December 31, 2007. This compares with 25.0% the previous year. This figure is lower than the long-term debt to net assets ratio that the company held in the earlier part of the decade. This increase in debt is attributable to ongoing capital projects. It should be noted that the company has over the past five years seen better performance in years with higher debt levels, measured by net income before extraordinary items. UHS made $170.5 million last year and $192.1 million five years ago, both in high-debt environments. Its lowest year for debt was 2005, and it made just $109.8 on continuing operations.

The company's receivable turn is 7.9, which is higher than the sector average of 0.96. The industry average is irrelevant because many firms in the industry are suppliers, and thus do not have the same collection issues that direct health care providers face (Medicare, Medicaid, charity patients). This receivable turn results in an average collection period of 46.2 days.

The two largest payors for Universal Health Services are managed care providers (HMO and PPOs) and Medicare at 45% and 24% respectively. Medicaid is another significant payor at 13% of revenues. The remainder derives from individuals. At 18%, this portion represents the longest collection periods and highest rate of defaults of any customer base. However, because this base is so widespread, no single payor can be identified.

Financials - Income Statement

Universal Health Services has strong top line profitability, but their bottom line profitability lags their peers. The company has a gross margin of 79.39% with a five-year average of 77.41%. This compares to 10.72% last year for the sector and 57.74% as a five-year average for the sector. That UHS was able to maintain their margins while so many of their peers were not indicates strength.

The company's operating margin was 7.19%, with a five-year average… READ MORE

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