2 Reasons Universal Health Systems Has A Clear Path To Growth

Piper Jaffray’s Sarah E. James believes that given the above peer average volume growth generated by Universal Health Services, Inc. UHS, the company “deserves a premium closer to the 5-year average spread of 2.4x.”

The analyst upgraded the rating on the company from Neutral to Overweight, while raising the price target from $119 to $147.

Growth Levers

James believes there are two key growth drivers for Universal Health Services: “1) the company's ability to access 8-9 percent incremental EBITDA from IMD (The Medicaid Institutions for Mental Disease) exclusion will be sooner than expected as it resolves its labor issues in 2H17, and 2) the move into BH JVs (behavioral health joint ventures) with not-for-profit hospitals could provide further upside to EBITDA.”

The analyst expects the company to be able to outgrow its peers with these growth levers, while viewing the recent compression in spreads, compared to group leader HCA Holdings Inc HCA as overdone.

IMD Exclusion Benefits

James sees Universal Health Services as being better positioned to begin accessing an estimated $125 million–$151 million in incremental EBITDA, which would be unlocked due to the IMD exclusion, with labor shortage issues being resolved in second-half 2017.

“We estimate it has reopened 25–33 percent of the beds impacted by the labor shortage and believe it can reopen the remaining beds by the end of the year,” the analyst stated.

JV Advantages

In addition, James believes that there could be further upside for the company from joint ventures in terms of behavioral health partnerships, with 50 percent of the behavioral health market being run by non-for-profit hospital systems.

“We estimate the behavioral health market generates over $300B of revenue annually, which suggests ~ $150 million of revenue is generated by not-for-profit systems. Therefore, we believe UHS, as one of the premier behavioral health providers, can generate meaningful growth through JV partnerships with these not-for-profit systems,” the analyst pointed out.

Related Link: UHS SHAREHOLDER ALERT: The Law Offices of Vincent Wong Reminds Investors of a Class Action Involving Universal Health Services, Inc. and a Lead Plaintiff Deadline of February 21, 2017