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Encompass Health (EHC) Down 6.4% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Encompass Health (EHC). Shares have lost about 6.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Encompass Health due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Encompass Health Beats Q1 Earnings on Volume Growth

Encompass Health Corporation delivered first-quarter 2022 adjusted earnings of 97 cents per share, which beat the Zacks Consensus Estimate of 93 cents. Nevertheless, the bottom line declined 7.6% year over year.

Encompass Health’s net operating revenues advanced 8.4% year over year to $1,333.6 million in the first quarter. The top line also beat the consensus mark of $1,318 million.

The better-than-expected first-quarter results were supported by volume growth in Inpatient Rehabilitation and Home Health and Hospice businesses. While favorable pricing aided EHC’s Inpatient Rehabilitation unit, rising total admissions positively impacted its Home Health operations. The positives were partially offset by rising operating expenses and increased staffing costs.

Behind the Headlines

Adjusted EBITDA of $245 million declined 2.3% year over year in the quarter under review.

Total operating expenses of $1,149.7 million increased from $1,022.7 million a year ago due to higher salaries and benefits, other operating costs, general and administrative expenses. General and administrative expenses excluding stock-based compensation decreased 10.3% year over year to $31.3 million in the first quarter. This doesn’t include expenses related to the strategic alternative review of its home health and hospice business.

Segmental Results

Inpatient Rehabilitation

Revenues at the segment amounted to $1,059.3 million, which improved 10.4% year over year. This growth came on the back of a 10% rise in revenues from the inpatient business, riding on favorable pricing and volume growth. The segment’s revenue growth was also driven by the 31.3% surge in outpatient and other business revenues.

Growth in net patient revenue per discharge of 2.2% primarily resulted from increased reimbursement rates.

Adjusted EBITDA declined 3.7% year over year to $226.2 million in the first quarter, attributable to higher utilization and costs related to increased patient volume.

Home Health and Hospice

Encompass Health announced that it is looking forward to spin-off its home health and hospice business to create an independent, publicly-traded company and rebrand the HH&H Business as Enhabit Home Health & Hospice. EHC anticipates the spin-off to be effectuated on Jul 1.

In the first quarter, the segment’s revenues of $274.3 million increased 1.4% year over year owing to a 2.3% rise in revenues at the Home Health sub-unit, partially offset by a 2.4% slip in Hospice business.

In this segment, EHC witnessed its home health total admissions and same-store total admissions grow 4.9% and 0.9% year over year, respectively. However, total admissions in its Hospice business witnessed a 2.5% year-over-year decline.

Adjusted EBITDA declined 1.4% year over year to $50.1 million in the first quarter due to higher costs of services associated with increased labor expenses.

Financial Update (as of Mar 31, 2022)

Encompass Health exited first-quarter 2022 with cash and cash equivalents of $94.2 million, up from the 2021-end figure of $54.8 million. Total assets of $6,944 million increased from $6,864.9 million at 2021 end.

Its long-term debt, net of current portion, totaled $3,221.3 million, which dropped from $3,243.9 million as of Dec 31, 2021. The current portion of long-term debt was recorded at $42.8 million.

Net operating cash flow was recoded at $218.9 million, up from $158.5 million a year ago. Adjusted free cash flow of $165.9 million was up 54.5% year over year.

2022 Outlook

EHC considered the existing business structure while reiterating its guidance.

This year, management anticipates net operating revenues within $5,380-$5,500 million, up from $5,122 million in 2021. Adjusted EBITDA is projected in the range of $1,015-$1,065 million for 2022. The metric came in at $1,028 million in 2021. Adjusted earnings per share from continuing operations are forecast between $3.83 and $4.19 for the current year, down from $4.23 in 2021. This indicates weakness in operations.

Encompass Health intends to open eight additional de novo locations this year and increase the bed count. Further it expects adjusted free cash flow of $405 to $555 million for 2022. The 2021 figure was reported to be $498.8 million.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Encompass Health has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Encompass Health has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Encompass Health is part of the Zacks Medical - Outpatient and Home Healthcare industry. Over the past month, Quest Diagnostics (DGX), a stock from the same industry, has gained 4.3%. The company reported its results for the quarter ended March 2022 more than a month ago.

Quest Diagnostics reported revenues of $2.61 billion in the last reported quarter, representing a year-over-year change of -4%. EPS of $3.22 for the same period compares with $3.76 a year ago.

For the current quarter, Quest Diagnostics is expected to post earnings of $2.16 per share, indicating a change of -32.1% from the year-ago quarter. The Zacks Consensus Estimate has changed -2% over the last 30 days.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Quest Diagnostics. Also, the stock has a VGM Score of A.


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