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Will Regulations Hurt Universal Health’s Growth Prospects?


On Nov 25 2016, we have issued an updated research report on Universal Health Services, Inc. UHS.

The Pennsylvania-based company recently reported its third-quarter earnings of $1.60 per share that missed the Zacks Consensus Estimate by 4.2% but improved 4.5% year-over-year on solid revenue growth.

The company’s generates most of its operating revenues from the Medicare and Medicaid business. Notably, these businesses have accounted for 32% of Universal Health’s net patient revenues in the third quarter. Hence, the company is likely to be impacted adversely with the estimated reimbursement cuts worth $600 billion in these segments over the next decade. Also, the hospital payment cuts ordered by the Congress to increase payments to doctors are expected to put pressure on the company’s top line.

Though the company’s robust inorganic growth initiatives have boosted its revenue base, these have exposed it to severe integration risks.

Universal Health’s dependence on debt financing also has led to high interest expense. As of Sep 30, 2016, the company had $3.5 billion of long-term debt, up 5.2% from year-end 2015. Universal Health should rein in its rising debt level to curb its debt expenses and ensure bottom-line growth.

Donald Trump, upon taking up office as the 45th U.S. President, is expected to repeal the Affordable Care Act (ACA). Notably, this act had not only created medical coverage for billions of additional people in the nation but also lowered the number of unpaid bills for hospitals and healthcare service providers. Hence, it remains to be seen how Universal Health one of the medical sector firms fare going ahead.

However, growing number of insured patients, increasing investments in healthcare and an aging population of the U.S medical sector open up more opportunities for the company. We expect Universal Health to be able to perfectly utilize these untapped opportunities through its behavioral hospitals and acute-care platform.

Zacks Rank and Stocks to Consider:

Universal Health presently carries Zacks Rank #4 (Sell).

Investors can look at some better-ranked stocks from the medical sector like WellCare Health Plans Inc. WCG, Magellan Health Inc. MGLN and Humana Inc. HUM.

Magellan delivered positive surprise in three of the last four quarters with an average beat of 42.58%. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

WellCare delivered positive surprises in all of the last four quarters with an average beat of 40.01%. The company also has a Zacks Rank #1.

Humana delivered positive surprise in three of the last four quarters with an average beat of 1.94%. It carries a Zacks Rank #2 (Buy).

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