Universal Health Services' (UHS) business is swinging to a "more normal cadence" following a period of variability and distortions related to the COVID-19 pandemic, Morgan Stanley said in a note Wednesday.

Morgan Stanley said profitability in the company's behavioral segment has "rebounded sharply" and has marginally exceeded pre-pandemic levels. The behavioral health business accounts for 44% of Universal Health Services' revenue and 62% of its operating profit, according to the note.

"UHS is well positioned to address a growing gap in mental health care," Morgan Stanley said as it estimates that 23% of adults have mental health issues but only about half are being treated.

The operating margin of the company's acute care segment remains weighed down by higher physician fees, Morgan Stanley said. The investment firm also flagged a near-term overhang related to potential cuts in government spending.

Morgan Stanley initiated coverage on Universal Health Services, with an equal-weight rating and a $200 price target.

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