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6 Reasons Why Select Medical (SEM) Stock Looks Attractive

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Zacks Equity Research
·4 min read
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Select Medical Holdings Corp. SEM is poised to grow on the back of its diversified business, increasing top line, favorable cash flows, acquisitions and partnerships with various healthcare entities.

The stock currently sports a Zacks Rank #1 (Strong Buy). 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 earnings being revised 42% upward over the past 30 days.

Year to date, the stock with a market capitalization of $4.4 billion has gained 22.7% compared with its industry’s growth of 6.7%.

Other stocks in the same space, namely Community Health Systems, Inc. CYH and Tenet Healthcare Corporation THC have also rallied 87.9% and 33.4%, respectively, but DaVita Inc. DVA has lost 5.5% over the same time frame.

Here we see the company-specific factors that help the stock stand out in its industry.

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, aid in marketing efforts to referral sources and help negotiate payor contracts.

As of Dec 31, 2020, under its critical illness recovery hospital segment, the company operated 99 critical illness recovery hospitals across 28 states. In its rehabilitation hospital segment, it operated 30 rehabilitation hospitals in 12 states; in its outpatient rehabilitation segment, it ran 1,788 outpatient rehabilitation clinics across 37 states and the District of Columbia, and in its Concentra segment, it operated 517 occupational health centers in 41 states. With its presence in these areas, the company is well-positioned to benefit from rising demand for medical services owing to a swell in aging population in the United States, which will drive growth across its business segments.

Increasing Top Line: The company’s revenues have been improving over the years. The same was up 1.4% in 2020. Its critical illness recovery hospitals and rehabilitation hospitals witnessed a rise in its year-over-year occupancy rates during 2020. While volumes persistently pose the biggest challenge to the company’s outpatient rehabilitation and Concentra segments, the company saw improvements in both segments during the fourth quarter. These improving operating trends reflect volume growth and gradually, revenues will mirror the same uptrend.

Consistent Favorable Cash Flow: The company has an established track record of bettering financial performance of its facilities owing to its disciplined approach to revenue growth, expense management and focus on free cash flow generation. This, in turn, enables it to deploy funds to its business. The company expects to generate $450-$500 million of free cash flow somewhere in the neighborhood in the upcoming years.

Solid Inorganic Growth Story: Since its inception in 1997 through 2020, the company has completed 10 significant acquisitions including the integrations of Physiotherapy, Concentra and U.S. HealthWorks. The company has 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 buyouts also complemented the company’s organic growth.

Expertise in Partnering With Large Healthcare Systems: Over the past several years, the company has tied up with major healthcare systems to provide post-acute care services. The company provides operating expertise to these ventures through its experience in managing critical illness recovery hospitals, rehabilitation hospitals and outpatient rehabilitation facilities. Alliances with other healthcare entities helped the company bolster its top line.

Strong Guidance: Select Medical issued its business outlook for 2021. The company expects revenues for 2021 in the range of $5.65-$5.85 billion, indicating a 4% increase from the 2020 reported figure; adjusted EBITDA in the $840-$88 million band (suggesting 7.4% growth) and earnings per common share within $2.26-$2.48 (implying a 22.8% jump).

The company also provided a three-year CAGR revenue growth target of 4-6%, an adjusted EBITDA rise in the 7-8% band and EPS growth within the 17-20% range during the 2021-2023 forecast period.

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DaVita Inc. (DVA) : Free Stock Analysis Report

Community Health Systems, Inc. (CYH) : Free Stock Analysis Report

Tenet Healthcare Corporation (THC) : Free Stock Analysis Report

Select Medical Holdings Corporation (SEM) : Free Stock Analysis Report

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Zacks Investment Research