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Universal Health misses Q3 consensus estimates, continuing uneven 2019

Universal Health Services Inc.'s third-quarter results continued an inconsistent year for the hospital company, with missed consensus estimates on multiple key metrics and a stock dive of nearly 5%.

CFO Steve Filton said during an Oct. 25 third-quarter earnings call that the company failed to capitalize on admission increases in its acute care business due to staffing shortages across facilities. In certain markets, the company had to bring in more expensive temporary and registry nurses, and other nonlabor costs also increased due to the admissions increase.

"We acknowledge that we are operating in most of our markets with pretty tight labor conditions," Filton said. "I think we have a point of view that our operators, historically, have responded to these sorts of challenges and will ... drive greater efficiencies as they adjust for these higher level of volumes."

Piper Jaffray analyst Sarah James said in an Oct. 21 report that nursing staffing shortages could hinder admission growth and negatively impact revenue. While James noted that Universal Health has significantly improved its nursing shortages over 2018-2019, the company could pull in $15 million to $23 million in revenue and $2 million to $4 million in EBITDA by filling current staffing gaps.

Acute care admissions were up year over year by 7.4% in the third quarter, and acute care adjusted patient days were up year over year by 7%.

The King of Prussia, Pa.-based hospital company missed consensus estimates for net income by $104.2 million and normalized EPS by 31 cents.

Shortly after third-quarter results were released Oct. 24, the company's stock price began falling in after-market trading. The stock was down 4.87% to $137.71 as of 11:12 a.m. ET Oct. 25.

After missing internal revenue projections in the first quarter, Universal bounced back in the second quarter, beating consensus estimates for multiple metrics and earning a stock price rally of more than 10% in July. However, nearly half of that gain has been lost since then.

Challenges for behavioral health

Filton said that several other factors negatively impacted EBITDA for the behavioral health business, including a $3 million hit from currency exchange in the U.K. Other challenges included a $3 million to $4 million drag from addiction treatment and $2 million to restore operations to a Panama City, Fla., facility that was shut down due to hurricane damage in 2018, according to Filton.

RBC Capital Markets analysts said in an Oct. 25 report that the external headwinds Filton reported were the primary challenges the company faced in the third quarter. A slowdown in behavioral health was also a stress point, with relatively flat adjusted admissions of 0.5% year over year. Adjusted admission was up by 2% in the quarter, according to Universal Health.

James said in the nursing shortages report that Universal Health's shortages in behavioral health could stress admission volume growth. Requirements for nurse-to-patient ratios differ across states, which could impact how many patients facilities can admit and treat, according to James.

Admission growth in behavioral health totaled about 3.2% in 2016 and fell to 2.5% and 2.7% in 2017 and 2018, respectively, according to the report. Behavioral health admissions have increased year over year by 1.3% for the first nine months of 2019, according to Universal Health.

Filton acknowledged that staffing shortage issues have hurt revenues in behavioral health, even leading to certain facilities having to turn patients away. But the CFO remained optimistic that the company could "correct those situations and that volume and revenue growth can be restored in the behavioral segment."