Inpatient Rehab And Outpatient Access Improvements Will Secure Success

Key Takeaways

• Significant growth in the inpatient rehab division is driving revenue through expansion and increased patient capacity.
  
• Efforts in outpatient improvements and stock repurchases aim to enhance margins and shareholder returns despite regulatory challenges.
  
• Regulatory and environmental challenges, alongside debt burden and hospital occupancy issues, are impacting revenue and margins, squeezing profitability.

Catalysts

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

• The inpatient rehab division is experiencing significant growth and exceeding expectations, with plans to add 440 additional beds from Q2 2025 to the end of 2027. This expansion is expected to drive revenue growth through increased capacity and higher patient volumes.
  
• The company's inpatient rehab division saw a 16% increase in revenue and a 6% increase in average daily census in Q1 2025 compared to the same quarter last year. This trend suggests potential for improved earnings as new facilities reach maturity and occupancy rates stabilize.
  
• The outpatient division, despite challenges such as severe weather and Medicare reimbursement cuts, is focusing on improving patient access, productivity, and technology investment. These initiatives aim to improve net margins over time.
  
• Management is actively engaging with CMS regarding regulatory challenges impacting the Critical Illness Recovery Hospital division, which could lead to favorable policy changes and positively impact future earnings and adjusted EBITDA.
  
• The company continues to pursue strategic stock repurchases and reduce debt, potentially leading to higher EPS and improved shareholder returns as a result of decreased interest expenses and a smaller share count.

Select Medical Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Select Medical Holdings's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 5.0% in 3 years time.
• Analysts expect earnings to reach $305.8 million (and earnings per share of $1.49) by about May 2028, up from $60.8 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 10.7x on those 2028 earnings, down from 30.6x today. This future PE is lower than the current PE for the US Healthcare industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 1.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Select Medical Holdings Future Earnings Per Share Growth

Risks

• Regulatory challenges, including the increase in the high-cost outlier threshold and the 20% transmittal rule, are negatively affecting the Critical Illness Recovery Hospital division, leading to a decrease in revenue and adjusted EBITDA.
  
• The outpatient division is facing a 3% reduction in Medicare reimbursements, impacting net revenue per visit and squeezing margins for that sector.
  
• Interest expense remains significant due to the high level of outstanding debt ($1.8 billion), which could limit profitability and reduce net margins.
  
• Severe weather events have negatively impacted outpatient operations, suggesting potential future vulnerability of revenue streams to environmental factors.
  
• The decline in occupancy rates in new inpatient rehab hospitals could potentially affect earnings as these facilities take time to reach full occupancy levels.

Valuation

• The analysts have a consensus price target of $21.167 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 $15.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.1 billion, earnings will come to $305.8 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $14.45, the analyst price target of $21.17 is 31.7% 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.