Select Medical (NYSE:SEM) Holdings Corp. SEM is poised to grow on the back of its rising patient admissions, diversified business, increasing top line, favourable cash flows, acquisitions and partnerships with various healthcare entities.
The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 12% upward over the past seven days.
Having said that, here we see some company-specific factors that help the stock stand out in its industry.
Favorable VGM Score and Top Zacks Rank: The company currently has a Zacks Rank #2 and a VGM Score of A. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) offer the best investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
Strong Guidance: Following second-quarter 2021 results, the company revised its earnings estimates for the second time this year. Revenues are now estimated to be $5.85-$6.05 billion, up from the previous outlook of $5.7-$5.9 billion (indicating 7.5% growth from the 2020 reported figure). Adjusted EBITDA for 2021 is forecast between $970 million and $1 billion, hinting at growth from the prior guidance of $870-$900 million (suggesting 23% growth from the 2020 reported figure). Earnings per share are expected within $2.91-$3.08, higher than the previous projection of $2.41-$2.58 for 2021 (implying 55.2% jump from 2020 reported figure).
Over the 2021-2023 forecast period, the company’s long-term guidance for revenues, adjusted EBITDA and earnings per share were unchanged from the prior outlook. The company is targeting a revenue CAGR in the range of 4-6%, adjusted EBITDA in the 7-8% band and EPS within 17-20%. A strong guidance instills investors’ confidence in the stock.
Increasing Top Line: Revenues have been increasing over the years. The same was up 17.5% in the first six months of 2021. Expansion of facilities and the rising incidence of diseases will steadily increase patient admissions, fuelling growth in turn.
Diversified and Complementary Lines of Business: The company is a leading operator in its business segments based on the number of facilities in the United States. Its leadership position and reputation as a high-quality, cost-effective healthcare provider in each of its business segments allows it to attract patients and employees, aids in marketing efforts to referral sources and helps negotiate payor contracts. As of Jun 30, 2021, the company had operations in 46 states and the District of Columbia. It operated 99 critical illness recovery hospitals in 28 states, 30 rehabilitation hospitals in 12 states, and 1,833 outpatient rehabilitation clinics in 38 states and the District of Columbia. Concentra, a joint venture subsidiary, operated 518 occupational health centers in 41 states as of Jun 30 2021.
With its presence in these areas, the company is well-positioned to benefit from rising demand for medical services owing to an aging population in the United States, which will drive growth across its business segments.
Proven Financial Performance and Strong Cash Flow: The company has an established track record of improving the financial performance of its facilities owing to its disciplined approach to revenue growth, expense management and a firm focus on free cash flow generation. This, in turn, enables it to deploy adequate funds to the business. The company expects to generate approximately $450-$500 million of free cash flow in the upcoming years.
Inorganic Growth: Since its inception in 1997 to date, the company has completed many significant acquisitions including the buyouts of Physiotherapy, Concentra and U.S. HealthWorks. The company improved the operating performance of these businesses over time by applying its standard operating practices and realizing efficiencies from its centralized operations and management. These takeovers complemented the company’s organic growth.
Successful Partnerships With Large Healthcare Systems: Over the past several years, the company has partnered with large healthcare systems to provide post-acute care services. It offers operating expertise to these ventures through its experience in running critical illness recovery hospitals, rehabilitation hospitals and outpatient rehabilitation facilities. Alliances with other healthcare entities also helped the company grow its top line.
Bottomline
Year to date, the stock with a market capitalization of $4.83 billion has gained 29% compared with its industry’s growth of 16.7%.
Image Source: Zacks Investment Research
Other stocks in the same space, namely Community Health (NYSE:CYH) Systems, Inc. CYH, Tenet Healthcare Corporation (NYSE:THC) THC and Da Vita Inc. DVA have rallied 72%, 69% and 13%, respectively, over the same time frame.
Select Medical is currently undervalued with its price to earnings ratio of 12.81 compared with the industry average of 17.59. With this valuation, the stock seems a good addition to one’s investment portfolio.
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