All companies have operating income (or losses), but not too many companies make their income from actual operations -- that is, surgery. United Surgical Partners (NASDAQ:USPI), an operator of short-stay surgical facilities, does.
Operations from operations were strong in the fourth quarter. Revenue climbed 27% to $113 million, and net income from continuing operations was up 45% on a per-share basis. A 13% increase in same-facility revenue, split pretty evenly between higher case volume and higher revenue per case, fueled the growth.
The company also produced nearly $58 million in free cash flow for 2004. Investors shouldn't expect to see much of that cash flow, though, as United Surgical Partners remains committed to using it to open new facilities or reduce its debt load, or both.
To that end, the company added 13 facilities in the fourth quarter and 22 for 2004. At year-end, it operated 86 sites, 48 of which were jointly owned with not-for-profit health providers.
With increasing numbers of baby boomers facing the sort of elective orthopedic, ob/gyn, and gastrointestinal procedures that United Surgical Partners specializes in, the outlook for growth seems pretty good. What's more, because only a small fraction of its business comes from Medicare or Medicaid, the company is largely insulated from government reimbursement cuts for surgical procedures.
Fools considering United Surgical Partners shares need to take note of some risks, though. First, the company is aggressively expanding its business, and that requires capital. While the company's internal free cash flow is growing, future debt and/or equity offerings might be needed as well. Secondly, that acquisition philosophy has resulted in intangible assets making up nearly half of total assets, and intangible assets is equal to about 85% of the company's shareholder equity.
Also, the market for outpatient surgery is becoming increasingly competitive. In addition to public companies such as AmSurg (NASDAQ:AMSG) and Symbion (NASDAQ:SMBI), small private entities are getting into the game. While United Surgical Partners' practice of aligning itself with major not-for-profit health systems should reduce the threat, no company (or investor) really wants to see increasing competition.
While valuation isn't cheap, that has to be considered in the context of a company that is growing at a 30%-plus clip. As such, the trailing enterprise value-to-free cash flow ratio of 20 and trailing price-to-earnings ratio (on continuing operations) of 35 aren't out of line. Of the literally hundreds of options investors have for playing the health-care space, United Surgical Partners certainly deserves consideration for Fools looking to do a little surgery on their portfolios.
Fool contributor Stephen Simpson, a chartered financial analyst, has no ownership interest in any stocks mentioned.
