Expanding Healthcare Services And Decisive Partnerships Propel Revenue Growth And Shareholder Value

Key Takeaways

• Expanding service demand through significant growth in neurological and stroke treatment areas suggests potential for future revenue increases.
  
• Strategic expansions and joint ventures, like with Piedmont in Georgia, aim at operational efficiency and market share growth, indicating optimistic revenue prospects.
  
• Dependency on Medicare and capital investments, alongside labor market stability and potential operational issues, could significantly impact financial performance and margins.

Catalysts

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

• Strong discharge growth, including significant increases in neurological conditions and stroke treatments, suggests expanding service demand, likely boosting future revenues.
  
• Investments in expanding bed capacity and opening new facilities, including tapping into new states, indicate growth strategies aimed at meeting unmet demand, potentially increasing market share and revenues.
  
• Expansion of joint venture partnerships, exemplified by the ongoing collaboration with Piedmont in Georgia, may optimize operational efficiencies and contribute to revenue growth through expanded service markets.
  
• Implementation of a major ERP conversion to Oracle Fusion is expected to streamline operations, implying potential long-term reductions in operational costs and improvements in net margins.
  
• Resumption of share repurchase activity and an increased dividend signal financial strength and commitment to returning value to shareholders, possibly influencing positively on earnings per share (EPS) growth.

Assumptions

• Analysts are assuming Encompass Health's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 8.3% in 3 years time.
• Analysts expect earnings to reach $537.9 million (and earnings per share of $4.93) by about September 2027, up from $409.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.5x on those 2027 earnings, down from 22.6x today. This future PE is lower than the current PE for the US Healthcare industry at 26.6x.
• Analysts expect the number of shares outstanding to grow by 0.39% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.83%, as per the Simply Wall St company report.

Risks

• The reliance on Medicare and Medicare Advantage discharges for revenue could be risky due to potential changes in reimbursement rates or policy adjustments by CMS, impacting net revenue and margins.
  
• The significant investment in new beds and facilities to support growth might elevate operational costs and capital expenditures, affecting short-term earnings and cash flow.
  
• Challenges related to the Oracle Fusion ERP conversion may lead to unforeseen expenses or operational disruptions, impacting financial performance and operational efficiency.
  
• An increase in bad debt expense due to medical necessity claim review audits suggests potential vulnerability to insurance claim denials, impacting net margins.
  
• Dependency on a stable or improving labor market for managing staffing costs; shifts in this market could increase labor expenses, pressuring operating margins.

Valuation

• The analysts have a consensus price target of $100.91 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 2027, revenues will be $6.5 billion, earnings will come to $537.9 million, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 5.8%.
• Given the current share price of $91.66, the analyst's price target of $100.91 is 9.2% 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.