Will Select Medical's Solid Run In 2019 Sustain In 2020?

Select Medical Holdings Corporation’s (NYSE:SEM) stock showed an impressive run in 2019, soaring 50.6% compared with its industry’s rally of 22.4%. The company’s consistently strong operating performance, backed by rising revenues and accretive acquisitions aided the stock.

Select Medical’s performance looks all the more encouraging when compared with the stock price gain of other companies in the same space, such as Encompass Health Corp. (NYSE:EHC) and HCA Healthcare, Inc. (NYSE:HCA) that have jumped 13.1% and 19.9%, respectively, over the same time frame. Tenet Healthcare Corp. (NYSE:THC) , however, outperformed the industry and Encompass Health by skyrocketing 123.2% 2019.

The stock has a Zacks Rank #1 (Strong Buy) and an impressive Value Score of A. Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank of 1 or 2 offer the best opportunities in the value investing space. You can see the complete list of today’s Zacks #1 Rank stocks here.

The stock has seen the Zacks Consensus Estimate for current-year and next-year earnings being revised 6.7% and 8% upward over the past 60 days.
Select Medical came online in 1997 and has grown to be one of the largest operators of critical illness recovery hospitals, outpatient rehabilitation clinics and occupational health centers in the United States based on the number of facilities.

The company’s payor mix includes medicare and non-medicare. Over the years, the company has reduced its revenue dependence on Medicare from 45% in 2014 to 27% in 2018. This, in turn, reduces the company’s dependence/reliance on the stream of revenues that is subject to government reimbursement, driven by regulation.

The company is a leading provider of rehabilitation services and its network has strengthened on the back of a number of new joint ventures and partnerships forged/formed/built with other healthcare entities over the past many years.

Its revenue base has been increasing over the years, witnessing a CAGR of 13.5% (2014-2018) and climbing up 7% in the first nine months of 2019. This growth rate was achieved owing to the company’s leadership position and reputation as a high-quality, cost-effective healthcare provider in each of its business segments, which allows it to attract patients and employees, aids in marketing efforts to referral sources and helps negotiate payor contracts. For 2019, the company expects net revenues in the range of $5.375-$5.475 billion, indicating 6.7% growth from the year-ago reported figure (calculated at the mid-point).

Numerous acquisitions made by the company over the years have contributed to its inorganic growth, the most notable ones being U.S Health Works, Physiotherapy Associates and Concentra. Select Medical is well-positioned to capitalize on the consolidation opportunities within each of its business segments, which operate in a highly fragmented market and augment its internal growth. With its geographically diversified portfolio of facilities in the United States, the company’s footprint provides a wide-ranging perspective on multiple acquisition prospects.

Select Medical’s Concentra segment is poised to grow from the acquisition of U.S. HealthWorks in 2018, led by increased visits, decreased patient turnaround times and enhanced staffing efficiencies. Concentra is the nation’s largest provider of occupational health services. This segment’s expanded national presence coupled with its focus on quality care and patient/client satisfaction gives the company a distinct competitive edge and will fuel growth opportunities going forward.

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