Finance

A Side-by-side Analysis of Community Health Systems, Inc. (CYH) and Universal Health Services, Inc. (UHS)

Community Health Systems, Inc. (NYSE:CYH) and Universal Health Services, Inc. (NYSE:UHS) are the two most active stocks in the Hospitals industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CYH to grow earnings at a 9.87% annual rate over the next 5 years. Comparatively, UHS is expected to grow at a 7.90% annual rate. All else equal, CYH’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns



Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Community Health Systems, Inc. (CYH) has an EBITDA margin of 9.23%, compared to an EBITDA margin of 16.92% for Universal Health Services, Inc. (UHS). This suggests that UHS underlying business is more profitable. CYH’s ROI is -4.70% while UHS has a ROI of 10.10%. The interpretation is that UHS’s business generates a higher return on investment than CYH’s.

Cash Flow 

If there’s one thing investors care more about than earnings, it’s cash flow. CYH’s free cash flow (“FCF”) per share for the trailing twelve months was +1.17. Comparatively, UHS’s free cash flow per share was -0.79. On a percent-of-sales basis, CYH’s free cash flow was 0.73% while UHS converted -0.78% of its revenues into cash flow. This means that, for a given level of sales, CYH is able to generate more free cash flow for investors.




Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. CYH has a current ratio of 2.10 compared to 1.30 for UHS. This means that CYH can more easily cover its most immediate liabilities over the next twelve months. CYH’s debt-to-equity ratio is 11.36 versus a D/E of 0.85 for UHS. CYH is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CYH trades at a forward P/E of 44.58, a P/B of 0.64, and a P/S of 0.05, compared to a forward P/E of 13.41, a P/B of 2.25, and a P/S of 1.06 for UHS. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. CYH is currently priced at a 3.21% to its one-year price target of $7.17. Comparatively, UHS is -13.88% relative to its price target of $130.73. This suggests that UHS is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.10 for CYH and 2.10 for UHS, which implies that analysts are more bullish on the outlook for CYH.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. CYH has a beta of 1.58 and UHS’s beta is 1.03. UHS’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. CYH has a short ratio of 6.18 compared to a short interest of 4.07 for UHS. This implies that the market is currently less bearish on the outlook for UHS.

Summary

Universal Health Services, Inc. (NYSE:UHS) beats Community Health Systems, Inc. (NYSE:CYH) on a total of 8 of the 14 factors compared between the two stocks. UHS is growing fastly, generates a higher return on investment and has lower financial risk. UHS is more undervalued relative to its price target. Finally, UHS has better sentiment signals based on short interest.

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