US Home Health Demand And Value-Based Care Will Create Future Opportunities

Key Takeaways

• Structural trends and targeted expansion in underserved markets are driving sustained revenue growth and building a reliable recurring revenue base.
  
• Operational efficiency from technology adoption and payer innovation contracts is expanding margins and improving cash flow, enhancing flexibility for future acquisitions and consolidation.
  
• Reliance on government payors, limited pricing power, branch closures, and labor cost pressures raise concerns about sustained growth, profitability, and margin stability.

Catalysts

Provides home health and hospice services in the United States.

• Growing demand among the aging U.S. population and the increased prevalence of chronic disease continue to provide a structural tailwind to patient volume, as evidenced by sustained sequential growth in home health and hospice admissions and average daily census, which is likely to drive ongoing topline revenue expansion.
  
• The industry-wide shift from inpatient to value-based and lower-cost care is reflected in Enhabit's increasing penetration of payer innovation contracts (44% of non-Medicare visits versus 38% prior year), higher non-Medicare revenue per visit, and margin gains-supporting stable gross margins and expanding net margins as these arrangements scale.
  
• Technology adoption, including the full deployment of Medalogix Pulse and internally-developed productivity tools, is driving reductions in visits per episode, improved staff productivity, and lower cost per patient day, which supports continued margin expansion and operating leverage.
  
• The company's active expansion in underserved markets through de novo hospice facilities and strategic hiring is extending market reach and building capacity ahead of demand, providing a recurring revenue base and supporting sustained revenue growth.
  
• Improved cash flow generation, balance sheet deleveraging, and the end of covenant restrictions enhance Enhabit's flexibility for tuck-in acquisitions, positioning it to benefit from industry consolidation and boost future earnings and cash flow predictability.

Enhabit Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Enhabit's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -13.4% today to 2.3% in 3 years time.
• Analysts expect earnings to reach $27.3 million (and earnings per share of $0.52) by about July 2028, up from $-138.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $41.7 million in earnings, and the most bearish expecting $18.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.8x on those 2028 earnings, up from -2.5x today. This future PE is greater than the current PE for the US Healthcare industry at 21.0x.
• Analysts expect the number of shares outstanding to grow by 0.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.56%, as per the Simply Wall St company report.

Enhabit Future Earnings Per Share Growth

Risks

• Despite sequential growth in both home health and hospice, consolidated net revenue decreased 1.0% year-over-year, indicating potential stagnation in topline growth, which could limit long-term revenue and earnings expansion.
  
• Medicare patient volumes have experienced negative year-over-year growth, and management is focused on merely slowing the rate of decline rather than reversing it, which raises concerns about Enhabit's reliance on government payors and the risk of continued revenue pressure from shrinking Medicare volumes and potential reimbursement cuts.
  
• Although there is optimism surrounding non-Medicare admissions-particularly via "payer innovation contracts"-many of these contracts are 2-3 years in length with limited escalation protection, making long-term pricing power vulnerable to inflation and competitive pressures, which could compress net margins and earnings.
  
• Ongoing branch closures (with 7 branches closed or consolidated in Q1 and more closures planned) and outsourcing initiatives signal cost control efforts but also suggest possible challenges in growth scalability or exposure to competitive threats, which could result in limited market expansion and volatile profitability.
  
• Labor inflation remains a risk, as some markets are experiencing higher wage pressure and require additional compensation adjustments; persistent or worsening workforce shortages and wage demands may erode margin improvements achieved through efficiency gains, thereby pressuring long-term net margins and earnings.

Valuation

• The analysts have a consensus price target of $10.25 for Enhabit based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $9.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $27.3 million, and it would be trading on a PE ratio of 23.8x, assuming you use a discount rate of 7.6%.
• Given the current share price of $6.76, the analyst price target of $10.25 is 34.0% 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.