Shareholders of Universal Health Services would probably like to forget the past six months even happened. The stock dropped 20.7% and now trades at $168.95. This may have investors wondering how to approach the situation.

Is now the time to buy Universal Health Services, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Universal Health Services Not Exciting?

Even though the stock has become cheaper, we’re cautious about Universal Health Services. Here are three reasons you should be careful with UHS, plus one stock we’d rather own.

1. Same-Store Sales Falling Behind Peers

Investors interested in Hospital Chains companies should track same-store sales in addition to reported revenue. 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 4.2% 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.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Universal Health Services’s revenue to rise by 4.8%, a deceleration versus its 8.2% annualized growth for the past five years. This projection doesn’t excite us and indicates its products and services will face some demand challenges.

3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Universal Health Services has shown mediocre cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 4.6%, below what we’d expect for a healthcare business.

Final Judgment

Universal Health Services’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 7.4× forward P/E (or $168.95 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better stocks to buy right now. Let us point you toward one of our top software and edge computing picks.

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