Concentra Spin-Off And Rehab Expansion Will Improve Future Efficiency

Key Takeaways

• Spin-off of Concentra allows focus on core business, improving efficiency and capital deployment for future growth.
  
• Development pipeline and debt refinancing enhance growth prospects, while labor cost management and rate improvements drive EBITDA growth.
  
• High debt and expansion costs may pressure net margins and limit flexibility, while reimbursement rate declines could challenge revenue growth in rehab divisions.

Catalysts

Through its subsidiaries, operates critical illness recovery hospitals, rehabilitation hospitals, and outpatient rehabilitation clinics in the United States.

• The spin-off of Concentra is likely to allow Select Medical to focus on its core business lines, potentially improving operational efficiency and strategically deploying capital to drive future growth. This could positively impact earnings and net margins.
  
• Select Medical's active development pipeline, including the planned addition of 481 inpatient rehab beds by 2026, has the potential to significantly increase revenue growth. These facilities are expected to mature quickly and lead to substantial EBITDA growth in subsequent years.
  
• The refinancing of $1.6 billion of debt is expected to reduce interest expenses and extend the maturity profile of Select Medical’s debt, enhancing cash flow and allowing for potentially higher net margins in the future.
  
• Improvements in labor cost management, including stabilization of agency nurse rates and reductions in sign-on bonuses, are expected to positively impact net margins, as the company's SW&B as a percentage of revenue continues to decrease.
  
• The outpatient rehab division’s focus on commercial rate improvements and enhanced productivity through technology advancements are expected to drive double-digit EBITDA growth, positively impacting both revenue and earnings.

Select Medical Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Select Medical Holdings's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.9% today to 3.8% in 3 years time.
• Analysts expect earnings to reach $239.8 million (and earnings per share of $1.69) by about March 2028, up from $45.0 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 14.7x on those 2028 earnings, down from 49.9x today. This future PE is lower than the current PE for the US Healthcare industry at 24.9x.
• Analysts expect the number of shares outstanding to decline by 0.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.45%, as per the Simply Wall St company report.

Select Medical Holdings Future Earnings Per Share Growth

Risks

• The spin-off of Concentra may lead to uncertainties and resource reallocations that could impact revenue and operational focus in the short term.
  
• Despite refinancing efforts and reduced interest expenses, the company maintains high levels of debt ($1.7 billion), which could pressure net margins and limit financial flexibility.
  
• While the expansion plans are ambitious, the associated start-up losses and integration costs could hinder near-term earnings growth and EBITDA margins.
  
• Revenue from the inpatient rehab division is susceptible to disruptions, such as those caused by hurricanes, which impact occupancy and bed utilization, potentially affecting revenue and net profit margins.
  
• Declines in Medicare reimbursement rates could adversely impact the outpatient rehab division's revenue per visit, challenging net revenue growth despite commercial rate improvements.

Valuation

• The analysts have a consensus price target of $22.8 for Select Medical Holdings 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 $25.0, and the most bearish reporting a price target of just $19.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.3 billion, earnings will come to $239.8 million, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $17.4, the analyst price target of $22.8 is 23.7% 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.