Universal Health Services ( UHS) has boosted its immunity to hospital sector pain. Through a major acquisition, the company will further bolster its psychiatric operations and lessen its dependence on the more traditional -- and volatile -- acute-care hospital business. The company is paying $207 million in cash for 46 facilities ranging from residential treatment centers to therapeutic day schools, in order to achieve that diversity. "The facilities we are acquiring provide an opportunity to expand our residential treatment facilities, which have been a solid performer," said Debra Osteen, president of the company's behavioral health division. "These facilities are very well run and an excellent addition to our portfolio." Specifically, Universal is buying 21 residential treatment facilities, 21 therapeutic day schools and four detention centers from the privately held Keys Group. In a separate transaction, the company has also purchased four additional therapeutic boarding schools -- only one of which is currently open -- and an outdoor intervention program from a bankrupt operation in Texas. Already, Universal stands out as the only publicly traded hospital chain with a major presence in the psychiatric business. Right now, in fact, only a third of the company's facilities focus on acute, rather than behavioral, care. Going forward, however, that difference will become even more pronounced, as the company emerges with a full 100 behavioral facilities under its control. Moreover, the company will be covering some new ground in the process. "The acquisition enables us to enter a new business in nonpublic therapeutic day schools," Osteen explained. "We believe there is a need for this service and hope to expand the current operations and grow in other areas of the country." Investors, long disappointed by Universal's acute-care business, have started banking on a cure. They pushed the company's stock up 2.3% to $47.22 in heavy trading Monday.
Deutsche Bank analyst Darren Lehrich foresees a quick rise in earnings ahead. Lehrich expects the recent acquisition to begin lifting the company's profits in the fourth quarter and, overall, add as much as 15 cents to the bottom line annually. In addition, he believes the company's recent stock buybacks -- and its new plans to repurchase another 2 million shares -- will further fatten profits. Thus, Lehrich sounds a bit more optimistic about Universal despite his lingering concerns regarding the company's acute-care operations. "We believe UHS's near-term results will continue to be impaired by the impact of
Hurricane Katrina on New Orleans operations and competitive pressures in south Texas," says Lehrich, who has a hold recommendation on the stock. "However, UHS's more aggressive buyback activity and strong position in the attractive behavioral market should allow UHS to achieve our 2006 EPS of $3.25." Indeed, Lehrich goes on to say, Universal could wind up beating that estimate by as much as 15 cents a share.
Good BehaviorAt least two analysts were recommending Universal's stock even before Monday's news. Ann Hynes of Leerink Swann reiterated her outperform rating on Universal last Thursday, following a meeting with company leaders. To be fair, Hynes acknowledged that Universal has "a long way to go in New Orleans" -- where it runs two severely damaged acute-care hospitals -- and continues to face growing competition from a physician-owned hospital in its important market of McAllen, Texas. However, she says, the company has enjoyed a rebound in its big Las Vegas market and continues to benefit from solid results at its behavioral health facilities. Indeed, Hynes found herself singling out the company's behavioral health operations -- and its potential for bigger stock buybacks -- when touting the stock last week.
Jefferies analyst Frank Morgan highlighted Universal's behavioral business when recommending the company's stock earlier this month as well. He also noted that Universal's management team had recently hinted at expanding this business, through both capital improvements and acquisitions, going forward. Thus -- despite lingering challenges in the company's acute-care business -- Morgan sees Universal as a far more attractive turnaround candidate than, say, troubled Tenet Healthcare ( THC). "Clearly UHS faces both difficult industry headwinds as well as company- and market-specific issues," he concedes. "But given the company's incredibly strong balance sheet and strong $200 million of free cash flow (yield of 7.4%), value investors with patience could be well rewarded for riding out the recovery."