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Zacks Investment Research downgraded Select Medical Holdings Corporation (SEM - Snapshot Report) 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 - Snapshot Report), Acadia Healthcare Company, Inc. (ACHC - Snapshot Report) and VCA Antech Inc. (WOOF - Snapshot Report). All these stocks hold a Zacks Rank #2 (Buy).

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