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Analysts Expect UHS’s 2016 Net Profit Margins to Rise Marginally

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Net profit margins

Growth in patient volume, controlled spending, and reduction in bad debt are expected to be the key drivers of Universal Health Services’ (UHS) financial performance in 2016.

Wall Street analysts have projected that Universal Health Services’ net profit margin will increase marginally from 7.5% in 2015 to 7.6% in 2016.

While the company continues to enjoy above-average performance in the Las Vegas and Southern California markets, the Texas market has proved to be a drag on the company’s total revenues. The loss of jobs in the Texas market in the oil and gas sector was one of the key factors that affected patient volumes and led to an increase in bad debts. To know more about Universal Health Services’ bad debt expenses, please refer to The story behind Universal Health Services’ bad debt expenses.

Universal Health Services also witnessed the increased use of contract labor in the acute care business as well as a shortage of psychiatrists in the behavioral health business in 2015. These problems may continue in 2016 and may pressure the company’s net profit margins.

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Addiction recovery business

Similar to peers such as HCA Holdings (HCA), Tenet Healthcare (THC), and Community Health Systems (CYH), Universal Health Services has been exploring different service areas, markets, and business models to boost its profit margins.

On September 18, 2015, UHS announced the acquisition of the Foundations Recovery Network, strengthening its position in the addiction recovery business. Foundations Recovery Network has a greater focus on out-of-network patients, and it employs direct-to-consumer marketing. This business strategy, coupled with Foundations Recovery Network’s infrastructure and technology, is expected to help Universal Health Services penetrate deeper into the addiction recovery business and other related businesses.

In addition to the addiction business, Universal Health Services also expects to leverage synergies from its Foundation Recovery Network business in other service lines.

These efforts are expected to translate into higher profit margins for Universal Health Services in future years. It will also have a positive impact on the share prices of the Guggenheim S&P 500 Equal Weight ETF (RSP). UHS makes up about 0.2% of RSP’s total portfolio holdings.

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