Solid 2Q for Universal Health

Universal Health Services UHS reported solid results on Monday that exceeded our expectations. However, we are keeping our fair value estimate unchanged for now. Revenue increased 8% compared with the prior-year quarter, fueled by solid performance in the firm's acute-care and behavioral divisions. Same-store acute-care facilities posted revenue growth of 7.6%, driven by a 7.0% pricing increase. This marks the second consecutive quarter UHS has posted impressive pricing gains in its acute-care division. As we noted before, we don't think this level of pricing growth is sustainable, and we expect revenue per admission growth to average closer to 4% over the long run. The behavioral division revenue increased 7.8% on a same-facility basis compared with the second quarter of 2007. As we expected, profitability pulled back sequentially compared with the first quarter of the year, but UHS is still comfortably beating our profitability estimate for 2008. We may inch up our operating margin forecast later in the year if UHS continues to surpass our assumptions. Bad debt expense, a metric we watch closely during a dragging economy, held relatively steady compared with the first quarter of 2008.