Home Health Demand And Hospice Expansion Will Drive Strong Long Term Earnings Power

Catalysts

About Enhabit

Enhabit provides home health and hospice care services that support patients with high quality, cost-effective post-acute care in their homes.

What are the underlying business or industry changes driving this perspective?

• Accelerating hospice growth, supported by sustained double-digit census increases, profitable de novo openings and expanding sales coverage, is expected to drive durable high margin revenue expansion and stronger earnings power.
• Rising demand for home based post-acute care as the preferred, lower cost alternative to institutional settings, combined with Enhabit’s national scale and strong quality metrics, is expected to support long term volume growth and revenue resilience.
• Ongoing payer innovation and recent renegotiations with national plans at higher per visit rates enhance pricing power, which is expected to lift average revenue per episode and support adjusted EBITDA margin expansion.
• Systematic visit per episode optimization, enabled by virtual clinical and authorization teams, is already lowering visits per episode and is expected to structurally improve unit cost efficiency, directly benefiting net margins and free cash flow conversion.
• Improving leverage metrics and increased liquidity from consistent free cash flow generation create capacity for targeted technology investments and potential M&A, which may accelerate top line growth while further scaling earnings.

Assumptions

This narrative explores a more optimistic perspective on Enhabit compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Enhabit's revenue will grow by 5.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -1.1% today to 2.8% in 3 years time.
• The bullish analysts expect earnings to reach $34.4 million (and earnings per share of $0.63) by about December 2028, up from $-11.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $30.8 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 22.2x on those 2028 earnings, up from -41.2x today. This future PE is lower than the current PE for the US Healthcare industry at 23.7x.
• The bullish analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.57%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Proposed CMS 2026 home health rate cuts, if finalized, could structurally compress reimbursement in Enhabit’s largest segment over multiple years, limiting the ability to grow prices in line with wage inflation and pressuring both revenue growth and adjusted EBITDA margins in Home Health.
• Growing dependence on multiyear Medicare Advantage and commercial payer innovation contracts exposes the company to periodic renegotiation risk, where future rate resets or volume disruptions like those seen in early Q3 could reduce unit revenue per patient day and dampen consolidated earnings momentum.
• Secular mix shifts within Home Health, including the stabilization but not full recovery of fee-for-service Medicare volumes, may lead to a sustained drag on average revenue per visit, requiring continued efficiency gains just to hold margins flat and risking deterioration in net margins if productivity improvements taper.
• Reliance on visit-per-episode optimization and aggressive cost controls as key levers to offset reimbursement pressure may face limits over time or risk impacting perceived care quality and referral relationships, which could slow admission and census growth and ultimately weigh on long-term revenue and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Enhabit is $12.0, which represents up to two standard deviations above the consensus price target of $9.75. This valuation is based on what can be assumed as the expectations of Enhabit's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $8.5.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $34.4 million, and it would be trading on a PE ratio of 22.2x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $9.69, the analyst price target of $12.0 is 19.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.