Aging US Population And Technology Will Reshape Post-Acute Care

Key Takeaways

• Expansion in inpatient rehabilitation and partnerships with major health systems aim to boost patient volumes, broaden network reach, and fuel long-term revenue growth.
  
• Technology integration, operational efficiency, and industry consolidation position the company for margin expansion, scalable acquisitions, and sustained profit improvement.
  
• Heavy exposure to regulatory reimbursement changes, rising labor costs, industry competition, and high debt levels threatens stability, margin growth, and long-term financial flexibility.

Catalysts

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

• The company is accelerating its inpatient rehabilitation hospital expansion with 440 additional beds planned from mid-2025 through the end of 2027, positioning itself to capture the rapidly increasing demand from an aging U.S. population and higher rates of chronic conditions, both of which drive sustained patient volume growth and recurring revenues.
  
• Ongoing improvements in managed care commercial rates and increased net revenue per visit in the outpatient division, combined with technology-driven productivity and patient access initiatives, are expected to drive operating margin expansion and increase both revenue and EBITDA in the coming years.
  
• The strong development pipeline, including new joint ventures with leading health systems such as UPMC, Cleveland Clinic, Banner, and Cox Health Systems, will broaden Select Medical’s referral network, enhancing market share and supporting robust top-line revenue growth for the inpatient rehabilitation business.
  
• Strategic optimization of the outpatient footprint through clinic consolidation, alongside continued investment in digital tools and workflow software, is set to enhance clinical capacity and patient throughput, leading to improved efficiency and higher net margins.
  
• Industry consolidation in post-acute care, with smaller providers struggling to keep pace, gives Select Medical the opportunity to execute value-accretive acquisitions and leverage its scale, leading to improved bargaining power and structurally higher profit margins over the long term.

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 6.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.2% today to 4.2% in 3 years time.
• The bullish analysts expect earnings to reach $264.0 million (and earnings per share of $2.1) by about July 2028, up from $60.8 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 14.6x on those 2028 earnings, down from 30.5x today. This future PE is lower than the current PE for the US Healthcare industry at 21.0x.
• Analysts expect the number of shares outstanding to decline by 1.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.44%, as per the Simply Wall St company report.

Select Medical Holdings Future Earnings Per Share Growth

Risks

• Repeated regulatory changes, such as the substantial increases in the high-cost outlier threshold and the 20% transmittal rule for LTACs, have already caused a significant decline in adjusted EBITDA and margins, highlighting the company’s acute vulnerability to future policy shifts that could further reduce both revenue and net margins.
  
• The company’s high dependence on government reimbursement—particularly Medicare—was evident in the quarter with a 3.2% reduction in the Medicare fee schedule directly decreasing outpatient division revenues and earnings, underscoring ongoing risks to top-line growth and margin stability from regulatory payment pressures.
  
• Rising labor and benefit costs in the critical illness division were reflected in an increased salary, wage, and benefit to revenue ratio, squeezing operational margins and pointing to the persistent challenge of sector-wide labor shortages and wage inflation, likely to pressure profitability over time.
  
• Intensifying industry competition, especially in outpatient and post-acute rehabilitation, has already led to the closure or consolidation of clinics even as new ones are opened, suggesting that pricing power and patient volumes may be pressured, thus potentially constraining future revenue and operating margin expansion.
  
• The company carries significant debt and lease obligations, with $1.8 billion in debt offset by just over $53 million in cash, meaning that any downturn in margins, higher interest rates, or disruptions in reimbursement could restrict flexibility and negatively impact earnings and strategic investments.

Valuation

• The assumed bullish price target for Select Medical Holdings is $25.0, 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 $25.0, and the most bearish reporting a price target of just $15.0.
• 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 $264.0 million, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of $14.4, the bullish analyst price target of $25.0 is 42.4% 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.