Universal Health Services, Inc. UHS has recently received rating action from Moody's Investors Service, a wing of Moody's Corp. MCO. The rating agency has affirmed the Corporate Family Rating (CFR) and the PD Probability of Default Rating of “Ba1”. Moody’s also reiterated the ratings of Universal Health’s senior secured notes. This apart, Moody’s affirmed “SGL-1” Speculative Grade Liquidity Rating with a stable outlook.

The ratings reflect Universal Health’s low dependence on debt, solid debt servicing capacity and generation of sufficient free cash flow. The company’s strong market positions in both its acute care hospital despite some market concentration and solid behavioral health segment results having also been considered for the rating action.

Moodys’ acknowledges that the company’s operational excellence is evidenced by its strong performance over last few quarters. Universal Health Services earnings of $2.10 per share in the first-quarter of 2017 surpassed the Zacks Consensus Estimate by 1.9% and also improved 6% year over year on higher revenues. The company’s robust inorganic growth has also contributed to strong revenue generation.

However, the ratings have been somewhat affected by reputational and financial risk associated with on-going enquiry into billing and business practices at some of the company's behavioral health facilities. Further, the ratings are limited by regulatory uncertainty created by the on-going healthcare reform efforts.

Shareholders have shown confidence on the stock. Over last three months, the stock has lost 4% compared with the Zacks Hospitals industry’s decline of 6%.

Moody’s is likely to upgrade its ratings for Universal Health if the company manages to resolve the outstanding litigation and investigation items and maintains conservative financial policies. Notably, Moody's expects the company to sustain a debt/EBITDA level below 2.5 times in order to be eligible for the next rating upgrade.

However, the ratings may be downgraded if Universal Health’s operating performance deteriorates and if the company’s reliance on debt increases for acquisitions or other capital deployment initiatives. Also, the company’s ratings may be downgraded if its debt/EBITDA remains above 3.0 times. In addition, any a significant escalation of legal liabilities or government investigations may also have an adverse effect on the rating action.

Zacks Rank and Stocks to Consider

Universal Health presently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Some better-ranked stocks from the medical sector are UnitedHealth Group, Inc. UNH and Humana Inc. HUM. Both of the stocks hold Zacks Rank #2 (Buy).

UnitedHealth, the leading Health Maintenance Organization (HMO) in the United States, topped estimates in all of the last four quarters with an average beat of 4.67%.

Humana, another HMO behemoth, surpassed expectations in all of the last four quarters with an average beat of 3.75%

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