Expanding Healthcare Services Will Drive Growth And Improve Net Margins

Key Takeaways

• Expansion through new hospitals and prefabricated construction methods is anticipated to drive revenue growth and operational efficiency.
  
• Strong cash flow and strategic market focus support sustained earnings growth and enhanced financial performance.
  
• Regulatory challenges, weather disruptions, labor costs, and reliance on government subsidies pose risks to Encompass Health's margins and revenue stability.

Catalysts

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

• Encompass Health is actively expanding its capacity through the addition of new beds, including the construction of new hospitals, which could drive revenue growth by meeting the increasing demand for inpatient rehabilitation services due to the aging population.
  
• The adoption of prefabricated construction methods is expected to reduce construction costs and shorten building times for new facilities, likely improving net margins by enhancing operational efficiency and potentially leading to faster revenue realization from new hospitals.
  
• The company's strong free cash flow generation and reduction in leverage, coupled with stable labor market conditions, enable reinvestment in growth opportunities and shareholder returns, supporting earnings growth.
  
• Encompass Health's strategic focus on maintaining a favorable payer mix and capturing market share from other care settings, like skilled nursing facilities, is expected to sustain discharge growth, contributing to higher revenues and improved financial performance.
  
• The company's proactive management of bad debt expenses and engagement with regulatory bodies to resolve payment claim reviews could improve net margins and earnings by minimizing financial volatility related to payer reimbursements.

Encompass Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Encompass Health's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.3% today to 8.6% in 3 years time.
• Analysts expect earnings to reach $582.2 million (and earnings per share of $5.25) by about November 2027, up from $431.5 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 25.9x on those 2027 earnings, up from 23.1x today. This future PE is greater than the current PE for the US Healthcare industry at 25.2x.
• Analysts expect the number of shares outstanding to grow by 3.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Encompass Health Future Earnings Per Share Growth

Risks

• Regulatory developments, like the Review Choice Demonstration, could pose challenges to Medicare compliance and reimbursement rates, which can impact net margins and overall earnings.
  
• Weather disruptions, such as the recent hurricanes, may continue to affect hospital operations and patient volumes, thereby impacting revenues and potentially reducing net earnings if associated costs increase.
  
• Rising labor costs, particularly in benefits and salaries, could squeeze operating margins if not offset by corresponding increases in revenue.
  
• The increasing costs and complexities associated with prefabricated hospital projects might not yield expected cost savings or efficiencies, potentially affecting capital expenditure projections and future earnings.
  
• Continued reliance on government programs and subsidies, which are subject to political and regulatory changes, could create financial uncertainty impacting revenue stability and predictability.

Valuation

• The analysts have a consensus price target of $115.25 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 2027, revenues will be $6.7 billion, earnings will come to $582.2 million, and it would be trading on a PE ratio of 25.9x, assuming you use a discount rate of 5.9%.
• Given the current share price of $99.1, the analyst's price target of $115.25 is 14.0% 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.