The projected fair value for Universal Health Services is US$396 based on 2 Stage Free Cash Flow to Equity
Current share price of US$205 suggests Universal Health Services is potentially 48% undervalued
Analyst price target for UHS is US$202 which is 49% below our fair value estimate
In this article we are going to estimate the intrinsic value of Universal Health Services, Inc. (NYSE:UHS) by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
The Method
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$794.0m
US$980.0m
US$1.03b
US$1.07b
US$1.11b
US$1.15b
US$1.18b
US$1.21b
US$1.25b
US$1.28b
Growth Rate Estimate Source
Analyst x2
Analyst x1
Est @ 4.93%
Est @ 4.17%
Est @ 3.63%
Est @ 3.26%
Est @ 2.99%
Est @ 2.81%
Est @ 2.68%
Est @ 2.59%
Present Value ($, Millions) Discounted @ 6.2%
US$747
US$869
US$858
US$841
US$821
US$798
US$774
US$749
US$724
US$699
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$7.9b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.2%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$34b÷ ( 1 + 6.2%)10= US$19b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$27b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$205, the company appears quite undervalued at a 48% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
NYSE:UHS Discounted Cash Flow July 26th 2024
Important Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Universal Health Services as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.2%, which is based on a levered beta of 0.835. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Universal Health Services
Strength
Earnings growth over the past year exceeded the industry.
Debt is well covered by earnings and cashflows.
Balance sheet summary for UHS.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Healthcare market.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Good value based on P/E ratio and estimated fair value.
Threat
Annual earnings are forecast to grow slower than the American market.
What else are analysts forecasting for UHS?
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Universal Health Services, there are three essential aspects you should further examine:
Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Universal Health Services , and understanding it should be part of your investment process.
Future Earnings: How does UHS's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
主要见解
根据2阶段自由现金流方式,Universal Health Services的预计公平价值为396美元。
当前的股价为205美元,表明Universal Health Services有可能被低估48%。
UHS的分析师价格目标是202美元,低于我们公平价值估计的49%。
在这篇文章中,我们将通过估算公司的未来现金流量并将其折现到其现值来估计Universal Health Services, Inc. (NYSE:UHS)的内在价值。这次我们将采用折现现金流模型(DCF)。虽然听起来很复杂,但实际上它很简单!
现金流折现的最重要的输入是贴现率和实际现金流。如果您不同意这些结果,请尝试计算并对假设进行调整。DCF也不考虑行业可能出现的周期性,或公司未来的资本需求,因此它不能完全反映公司的潜在表现。鉴于我们正在以潜在股东的身份审视Universal Health Services,所以使用的是权益成本作为贴现率,而不是成本资本(或加权平均成本)。这次计算中我们使用了6.2%的折现率,这是基于杠杆贝塔值(levered beta)为0.835。贝塔(beta)是衡量一只股票与整个市场的波动性的指标。我们的贝塔来自于与全球可比公司行业平均贝塔值相似的公司,这个范围在0.8到2.0之间是一个合理的范围。
Universal Health Services SWOT分析
优势
去年盈利增长超过了行业平均水平。
债务得到充分覆盖,收入和现金流决定了债务水平。
UHS资产负债表摘要。
弱点
相对于医疗市场前25%分红股票,分红较低。
机会
预计未来3年的年度收益将增长。
基于市盈率和预估公平价值,出现良好的价值。
威胁
预计年度收益增长速度将慢于美国市场。
分析师对UHS的其他预测是什么?
下一步:
估值只是构建投资论点的一方面,理论上它不能是您仔细研究公司的唯一分析工具。DCF模型并不是股票投资估值的全部,而应该被视为“什么假设需要成立,这只股票才算被低估/高估?”的指南。例如,如果终端价值增长率略有调整,可能会极大地改变整体结果。为什么内在价值高于当前股价?对于Universal Health Services,有三个必要的方面需要进一步研究:
风险:例如,可能存在投资风险。我们已经确定了一个关于Universal Health Services的警示信号,并且理解它应该是您投资过程中的一部分。