Stock Pick: Encompass Health (EHC)

Encompass Health (EHC) presents a compelling buy opportunity due to its strong financial performance, positive earnings guidance, and robust market position. The company’s recent earnings beat and raised guidance for 2024 indicates a solid growth trajectory, making it an attractive investment. Do not invest in Encompass until you consult with your investment advisor to see if it meets your investment profile and goals.

Company

Encompass Health Corp. provides post-acute healthcare services through a network of inpatient rehabilitation hospitals and home health and hospice services.

Founded in 1984, the company is headquartered in Birmingham, Alabama.
The majority of its revenue comes from inpatient rehabilitation, which offers specialized rehabilitative treatment for patients recovering from various conditions.

Financial Performance and Earnings Guidance

Encompass Health recently reported impressive third-quarter results for 2024, with an 11.9% increase in net operating revenue and a 13.4% increase in adjusted EBITDA. The company also raised its full-year 2024 guidance, with expected net operating revenue between $5.275 billion and $5.350 billion, and adjusted EBITDA between $1.070 billion and $1.090 billion. Analysts have responded positively, with several maintaining a Buy rating, and increasing earnings expectations and price targets.

Valuation Analysis

Encompass Health’s current market capitalization stands at $9.95 billion, with a price-to-earnings (P/E) ratio of 23.884. The forward P/E ratio is 20.66, indicating potential undervaluation based on projected earnings. The company’s price-to-sales ratio is 1.91, and its price-to-book ratio is 5.414.

Peer Analysis

Comparing Encompass Health to its industry peers, such as Ensign Group, PACS Group, and Acadia Healthcare Co reveals its strong market position. Encompass Health ranks highest in revenue growth and gross profit margin among its peers. However, it has the lowest return on equity, which could be an area for improvement.

Risks

While Encompass Health shows strong potential, there are risks to consider. Company-specific risks include potential disruptions from natural disasters, as seen with the recent hurricanes, and the need to manage operating costs effectively. Additionally, changes in healthcare regulations and reimbursement rates could impact the company’s financial performance.

Conclusion

Encompass Health (EHC) is a buy due to its solid financial performance, positive earnings guidance, and robust market position. Investors should consider the company’s growth potential and monitor any industry-specific risks. With a reasonable valuation and strong fundamentals, Encompass Health presents an attractive investment opportunity.