U.S. Markets open in 9 hrs 9 mins

Select Medical Downgraded to Strong Sell

Zacks Equity Research

Zacks Investment Research downgraded Select Medical Holdings Corporation (SEM) to a Zacks Rank #5 (Strong Sell) on Nov 30, 2013.

Why the Downgrade?

Select Medical has witnessed downward estimate revisions after reporting mixed third-quarter 2013 results. Over the last 30 days, estimates declined with the 2013 Zacks Consensus Estimate going down by 4.3% to 90 cents per share (representing a year-over-year decline of 16.36%). The Zacks Consensus Estimate for 2014 also declined 7% to 93 cents per share over the same period with estimates moving downwards. Select Medical delivered negative earnings surprise in two of the last three quarters with a negative average surprise of 4.5%.

On Oct 31, Select Medical reported third-quarter earnings per share of 17 cents, missing the Zacks Consensus Estimate by 2 cents and the year-ago earnings by 3 cents. The decline was mainly attributable to Medicare sequestration cuts and a reduction in the Medicare revenue per patient day.

The quarter witnessed a 2.7% increase in operating expenses owing to high cost of services, general and administrative expenses and bad debt expenses. This increase overpowered the 1.3% increase in revenues and led to a margin contraction. Moreover, depreciation and amortization expenses also increased for Select Medical owing to losses incurred by start-up companies and joint ventures.

In terms of the financial position of the company, Select Medical experienced a year-over-year decline in operating cash flow in the first nine months of 2013. The debt-burden of the company also increased over the first nine months of 2013 when compared to year-end 2012.

The company also expects to incur a negative $15 million impact after mitigation from the 25 per cent rule in 2014, higher than that estimated earlier (between $5 million and $10 million).

Other Stocks to Consider

Some better-ranked stocks in the healthcare services space include Centene Corp. (CNC), Acadia Healthcare Company, Inc. (ACHC) and VCA Antech Inc. (WOOF). All these stocks hold a Zacks Rank #2 (Buy).

Read the Full Research Report on ACHC
Read the Full Research Report on SEM
Read the Full Research Report on WOOF
Read the Full Research Report on CNC

Zacks Investment Research