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92%. This compares to the 0.36% for its peers last year and 17.42% over five years for the sector. UHS has a net profit margin of 3.86% and a five-year average net profit margin of 4.49%. The sector averaged a net profit margin of -0.38% last year, but has a five-year average of 12.27%. What this indicates is that historically UHS has lagged its peers in terms of bottom line margins. They have, however, been able to sustain those margins during a downturn in the business cycle whereas their competitors have struggled. This stability is a sign of financial strength. It may also contribute to their willingness to be more highly levered than most of their competitors in order to drive growth.
Revenue growth last year was 13.36%. This compares with 6.5% the previous year and 8.19% the previous year. The five-year average growth rate is 8.01%. Revenues grew faster than cost of revenues last year. The cost of revenues grew 6.48% in 2007. In 2006 the cost of revenues grew 1.7%. Over the past five years the cost of revenues grew at an average of 5.62%. The result is annualized gross profit growth of 8.72%.
However, operating expenses have grown more rapidly than revenues. In 2007 operating expenses grew 18.75%. However, in 2006 they declined -0.01%. Over the past five years, operating expenses have grown an average of 8.94%. The results of these changes in operating expenses have manifested directly on the bottom line. In 2006, when operating expenses declined, the company returned a record operating income of $458.7 million. Yet the spike in operating expenses last year resulted in decline in operating income of 30.5% to $318.4 million.
This has translated to net income as well. Aside from 2005, which saw a gain of $131 million on discontinued operations, net income has moved in lockstep with operating expenses. Last year saw a decline in net income of 34.3% from $259.6 million to $170.5 million. The net margin in 2007 was 3.58%; in 2006 it was 6.19%. Recent quarterly results have seen a slight improvement in net margin. The tax rate has held relatively steady over the study period.
The return on net assets ratio is 5.27%, with a five-year average of 5.99%. For the sector the average return on net assets ratio last year was 1.42%, but the five-year average was 7.59%. This mirrors other aspects of UHS' performance vs. its peers. It has underperformed on average but outperformed last year by virtue of being able to maintain its gross margin. The ROI mirrors this trend, though the ROE shows a history of outperformance. This can largely be attributed to the fact that UHS is more highly levered than its peers.
Financials - Statement of Cash Flows
UHS has struggled recently in terms of generating cash flows from operations. The company generated $348.5 million last year and just $169.2 the previous year. The high net income in 2006 was attributed largely to non-cash items and changes in the working capital. Despite steady top-line growth over in recent years, UHS has been unable to translate that into growth in cash flow from operations.
In recent years, UHS has increased its capital investments. Capital investments in the past two years have been $339.8 million and $341.1 million respectively. This represents a significant increase from previous levels. The company has engaged in several small capital projects and mergers in recent years as part of its growth strategy.
To pay for this expansion, UHS has undertaken significant amounts of new debt in the past few years. The company issued $459.5 million in debt in 2006 and a further $174.5 million in 2007. This followed on the 2005 retirement of $149.9 million in debt. That debt retirement coincided with a decline in capital expenditures. That strategy, however, appears to have been simply a year off before launching into the next round of expansion. With improvements in operating cash flows in the past couple of years, there has been little change in UHS' cash position over that period.
The best opportunity for UHS to improve financial performance is to reduce their operating expenses. The largest components of operating expenses are selling, administrative and general expenses. Overall, operating expenses have grown at a higher rate that revenues or profits in the past five years. After holding the line on operating expenses in 2006 and experiencing strong profit growth as a result, UHS saw a spike in operating expenses in 2007 and the result was a steep reduction in profit.
Part of the increase in operating expenses can be attributed to the company's expansion programs. It is recommended that the administrative infrastructure be held at the current levels even as the company continues to expand. This will allow operating expenses to be reduced in relation to revenues. The company already pays more in interest than its competitors, so it is imperative to hold operating expense growth to a minimum in order to match competitor's margins. At this point, UHS has what is essentially a nationwide infrastructure. They can improve revenues while holding the line on operating expenses by focusing their efforts on existing markets. A concentration on infill expansion will allow for this. To achieve this, UHS should specifically target its expansion efforts on strong growth markets in the Sunbelt.
Another recommendation for UHS is to hold the line on new debt. The company has found an efficient capital structure, but there are some impacts on performance as a result of their interest obligations. Moreover, shareholder value has not improved in the past several years. Before the recent collapse of the stock price, UHS stock had tread water for several years. This may have been stronger than the performance of its peer group, but still represents a lack of improvement of shareholder value. The company should focus more effort on growth without increasing its debt obligations in order to improve performance.
UHS is a company that is good at everything, but not great at anything. They run a nationwide network of health care facilities and are the number three firm in the industry. They have excellent gross margins that nonetheless do not translate to the bottom line because of high operating expenses. In lieu of developing a source of competitive advantage, UHS should focus on improving its operational efficiency. They can do this by focusing on growth via infill of their current markets. This will allow them to increase revenue without dramatically increasing their operating expenses. This represents an opportunity for them to match the bottom line performance of their competitors.
UHS is not likely to develop competitive advantage any time soon. Their markets are not mature yet but they are headed in that direction. Therefore, UHS should begin to focus on operational efficiency and controlling their debt…[continue]
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