Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Undervalued Stocks for the Enterprising Investor – August 2017. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how Universal Health Services Inc (UHS) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Universal Health Services, Inc. is a holding company. The Company’s principal business is owning and operating, through its subsidiaries, acute care hospitals and outpatient facilities, and behavioral healthcare facilities. The Company’s segments include Acute Care Hospital Services, Behavioral Health Services and Other. As of February 28, 2017, the Company owned and/or operated 319 inpatient facilities, and 33 outpatient and other facilities, located in 37 states, Washington, District of Columbia, the United Kingdom, Puerto Rico and the United States Virgin Islands. The Company’s hospitals provide a range of services, such as oncology, diagnostic care, coronary care, pediatric services, pharmacy services and/or behavioral health services. As of February 28, 2017, its acute care facilities located in the United States included 26 inpatient acute care hospitals; four free-standing emergency departments, and four outpatient surgery/cancer care centers and one surgical hospital.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$10,381,065,518||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.33||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||215.99%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||15.50||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||2.19||Pass|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||1.33||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||9.05||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||9.89%|
|MG Value based on 3% Growth||$101.47|
|MG Value based on 0% Growth||$59.48|
|Market Implied Growth Rate||3.50%|
|% of Intrinsic Value||54.81%|
Universal Health Services, Inc. qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $4.22 in 2013 to an estimated $7 for 2017. This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.5% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Universal Health Services, Inc. revealed the company was trading above its Graham Number of $92.07. The company pays a dividend of $0.4 per share, for a yield of 0.4% Its PEmg (price over earnings per share – ModernGraham) was 15.5, which was below the industry average of 37.66, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-40.98.
Universal Health Services, Inc. performs fairly well in the ModernGraham grading system, scoring a B.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$40.98|
|Number of Consecutive Years of Dividend Growth||3|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||6/1/2017|
|Total Current Assets||$1,763,160,000|
|Total Current Liabilities||$1,322,229,000|
|Shares Outstanding (Diluted Average)||97,042,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$8.03|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$7.00|
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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.