Expansion And Clinical Advancements Will Address Growing Rehabilitation Demand

Key Takeaways

• Strategic market expansion through new hospitals and Medicare focus is set to enhance revenue and net margins.
  
• Leveraging scale, clinical expertise, and innovations is strengthening competitive advantage and boosting earnings through quality care improvements.
  
• Regulatory challenges, cost pressures, and construction constraints could negatively impact revenues, margins, and future growth, while relying on managed care contracts remains crucial.

Catalysts

Provides post-acute healthcare services in the United States and Puerto Rico.

• Encompass Health plans to open 7 new de novo hospitals and 1 satellite hospital in 2025, increasing its capacity in existing markets, which is expected to drive revenue growth.
  
• The company is focusing on the growing Medicare beneficiary population, particularly those aged 65 and older, to capture a larger share of this expanding market, potentially increasing net margins.
  
• Encompass Health is leveraging its scale and clinical expertise to address the demand for inpatient rehabilitation services, enhancing its competitive advantage and potentially boosting earnings.
  
• The company is experiencing strong growth in Medicare Advantage discharges, driven by expanded markets and favorable enrollment trends, contributing to revenue increases.
  
• Investments in clinical innovations and predictive tools are improving patient outcomes, such as reduced fall rates and acute care transfers, supporting higher earnings through quality care efficiencies.

Encompass Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Encompass Health's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.5% today to 8.7% in 3 years time.
• Analysts expect earnings to reach $597.7 million (and earnings per share of $5.6) by about March 2028, up from $455.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.5x on those 2028 earnings, up from 21.6x today. This future PE is lower than the current PE for the US Healthcare industry at 23.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.25%, as per the Simply Wall St company report.

Encompass Health Future Earnings Per Share Growth

Risks

• Regulatory developments and ill-informed pre-authorization requirements by Medicare Advantage plans pose risks, potentially affecting revenues by restricting access to care.
  
• Cost trends, such as elevated group medical and high-cost specialty drug expenses, could increase expenses and negatively impact net margins.
  
• Potential future constraints in design and construction department capacity, due to CON permitting requirements, could delay planned expansions, thereby affecting future earnings growth.
  
• Risks related to potential supply chain issues or changes in legislation regarding construction materials and costs could lead to increased expenses, impacting net margins.
  
• Dependency on maintaining favorable managed care contract negotiations is critical for maintaining net revenue per discharge; any unfavorable changes could impact earnings.

Valuation

• The analysts have a consensus price target of $117.25 for Encompass Health based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.9 billion, earnings will come to $597.7 million, and it would be trading on a PE ratio of 23.5x, assuming you use a discount rate of 6.2%.
• Given the current share price of $97.64, the analyst price target of $117.25 is 16.7% 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.