Aging Population And Chronic Illnesses Will Expand Post-Acute Demand

Key Takeaways

• Expansion in inpatient rehab and outpatient system upgrades are driving accelerated margin recovery and earnings growth, positioning Select Medical as a market leader.
  
• Demographic shifts and hospital outsourcing trends fuel ongoing demand, while technology-driven efficiency and strong clinical reputation enable sustained profitability improvements.
  
• Reliance on facility-based care, rising labor costs, payer pressures, and high debt levels threaten long-term growth, margin stability, and earnings resilience.

Catalysts

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

• Analysts broadly agree that Select Medical's inpatient rehab expansion will drive strong revenue growth, but market demand and the company's accelerating joint venture pipeline could unlock capacity beyond current projections, potentially making the division a high-teens compound annual growth engine and pushing EBITDA margins well above the current 22 percent as new centers reach maturity.
  
• The analyst consensus views outpatient as a margin recovery story, yet with management's faster-than-expected nationwide system upgrades and improved scheduling already beginning to scale across a 2,000-plus clinic network, the division could surpass 10 percent EBITDA margin much earlier, rapidly expanding company-wide net margins and delivering outsized earnings acceleration.
  
• Demographic tailwinds from the rapid aging of the U.S. population and continued increases in chronic disease prevalence ensure that demand for Select Medical's inpatient and post-acute rehabilitation services will grow well ahead of GDP, providing multi-year visibility into top-line revenue expansion and sustained high occupancy rates.
  
• As general acute care hospitals continue to outsource complex post-acute and rehab services, Select Medical's nationally recognized hospital brands and their unprecedented reputation for clinical quality position the company as the preferred partner, accelerating high-margin referral streams and supporting premium pricing in future payer negotiations.
  
• The company's improving labor cost trends, combined with extensive deployment of technology for efficiency in both clinical and administrative operations, will drive sustained margin expansion, reduce per-case operating expenses, and translate directly into higher long-term EBITDA and free cash flow conversion.

Select Medical Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Select Medical Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Select Medical Holdings's revenue will grow by 5.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.5% today to 4.1% in 3 years time.
• The bullish analysts expect earnings to reach $252.2 million (and earnings per share of $2.05) by about August 2028, up from $81.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 11.3x on those 2028 earnings, down from 19.3x today. This future PE is lower than the current PE for the US Healthcare industry at 21.1x.
• Analysts expect the number of shares outstanding to decline by 4.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.3%, as per the Simply Wall St company report.

Select Medical Holdings Future Earnings Per Share Growth

Risks

• Ongoing and potential future reductions in Medicare and Medicaid reimbursement rates, as well as regulatory changes like the high-cost outlier threshold and the 20% transmittal rule, are causing significant revenue declines and EBITDA margin compression in critical illness recovery hospitals and outpatient rehab, which could continue to suppress earnings if these government payer pressures persist or worsen.
  
• Technological advances such as telemedicine, remote monitoring, and home health are likely to divert lower-acuity patients and rehabilitation volumes away from Select Medical's facility-based model, threatening occupancy rates, reducing inpatient revenue, and ultimately challenging long-term top-line growth.
  
• Increased labor costs, driven by lingering workforce shortages and wage inflation for nurses and therapists, are raising operating expenses, evidenced by higher salary, wage and benefit to revenue ratios, and could erode net margins particularly if inflation accelerates or labor markets tighten again.
  
• Select Medical maintains elevated leverage, with $1.9 billion in total debt and significant ongoing capital spending needs for hospital expansion, which raises the risk that higher interest rates or tighter credit markets could further increase interest expense and pressure earnings, especially if cash flows don't keep pace with debt service and capex needs.
  
• The company's revenues remain exposed to a shift in payer mix toward more aggressive managed care and Medicare Advantage plans, which are increasingly associated with reimbursement rate cuts, preauthorization challenges, claim denials, and revenue volatility, all of which can negatively impact topline growth and create sustained earnings headwinds.

Valuation

• The assumed bullish price target for Select Medical Holdings is $21.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Select Medical Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.0, and the most bearish reporting a price target of just $14.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $6.2 billion, earnings will come to $252.2 million, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 8.3%.
• Given the current share price of $12.6, the bullish analyst price target of $21.0 is 40.0% 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.