Universal Health Services has had an impressive run over the past six months as its shares have beaten the S&P 500 by 26%. The stock now trades at $234.41, marking a 32% gain. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

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Why Does UHS Stock Spark Debate?

With a network spanning 39 states and three countries, Universal Health Services (NYSE: UHS) operates acute care hospitals and behavioral health facilities across the United States, United Kingdom, and Puerto Rico.

Two Things to Like:

1. Outstanding Long-Term EPS Growth

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Universal Health Services’s EPS grew at an astounding 15% compounded annual growth rate over the last five years, higher than its 8.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

2. Increasing Free Cash Flow Margin Juices Financials

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Universal Health Services’s margin expanded by 6.9 percentage points over the last five years. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat. Universal Health Services’s free cash flow margin for the trailing 12 months was 5.7%.

One Reason to be Careful:

Same-Store Sales Falling Behind Peers

In addition to reported revenue, same-store sales are a useful data point for analyzing Hospital Chains companies. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Universal Health Services’s underlying demand characteristics.

Over the last two years, Universal Health Services’s same-store sales averaged 3% year-on-year growth. This performance slightly lagged the sector and suggests it might have to change its strategy or pricing, which can disrupt operations.

Final Judgment

Universal Health Services’s positive characteristics outweigh the negatives, and with its shares topping the market in recent months, the stock trades at 10.2× forward P/E (or $234.41 per share). Is now the right time to buy? See for yourself in our in-depth research report, it’s free.

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