Earnings

Critical Comparison: HCA Healthcare, Inc. (HCA) vs. Universal Health Services, Inc. (UHS)

HCA Healthcare, Inc. (NYSE:HCA) shares are up more than 12.43% this year and recently decreased -1.33% or -$1.11 to settle at $82.11. Universal Health Services, Inc. (NYSE:UHS), on the other hand, is down -0.40% year to date as of 12/05/2017. It currently trades at $106.09 and has returned 3.54% during the past week.

HCA Healthcare, Inc. (NYSE:HCA) and Universal Health Services, Inc. (NYSE:UHS) are the two most active stocks in the Hospitals industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect HCA to grow earnings at a 8.77% annual rate over the next 5 years. Comparatively, UHS is expected to grow at a 5.68% annual rate. All else equal, HCA’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 16.57% for Universal Health Services, Inc. (UHS). HCA’s ROI is 21.00% while UHS has a ROI of 10.10%. The interpretation is that HCA’s business generates a higher return on investment than UHS’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. HCA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.75. Comparatively, UHS’s free cash flow per share was +1.86. On a percent-of-sales basis, HCA’s free cash flow was 0.64% while UHS converted 1.81% of its revenues into cash flow. This means that, for a given level of sales, UHS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. HCA has a current ratio of 1.70 compared to 1.30 for UHS. This means that HCA can more easily cover its most immediate liabilities over the next twelve months.

Valuation

HCA trades at a forward P/E of 11.45, and a P/S of 0.66, compared to a forward P/E of 13.28, a P/B of 2.07, and a P/S of 0.97 for UHS. HCA is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. HCA is currently priced at a -6.59% to its one-year price target of 87.90. Comparatively, UHS is -14.12% relative to its price target of 123.53. This suggests that UHS is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for HCA and 2.10 for UHS, which implies that analysts are more bullish on the outlook for UHS.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. HCA has a beta of 0.53 and UHS’s beta is 0.97. HCA’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.HCA has a short ratio of 5.38 compared to a short interest of 2.73 for UHS. This implies that the market is currently less bearish on the outlook for UHS.

Summary

HCA Healthcare, Inc. (NYSE:HCA) beats Universal Health Services, Inc. (NYSE:UHS) on a total of 10 of the 14 factors compared between the two stocks. HCA is growing fastly, is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, HCA is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, THC has better sentiment signals based on short interest.

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