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Here's Why Select Medical (SEM) is an Attractive Bet Now

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Select Medical Holdings Corp. (SEM - Free Report) is poised to grow on the back of its diversified business, improving top line, favourable cash flows, accretive acquisitions and partnership deal wins with various healthcare entities.

The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 2.4% upward over the past 30 days.

Year to date, the stock with a market capitalization of $5.8 billion has gained 54% compared with its industry’s growth of 14.2%.

Zacks Investment ResearchImage Source: Zacks Investment Research

 

 

Let’s analyze some specific factors that help the stock stand out in its industry.

Solid VGM Score and Strong Zacks Rank: The company currently has a Zacks Rank #2 (Buy) 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 or 2 or 3 (Hold) offer the best investment opportunities. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

Increasing Top Line:  The company’s revenues saw a CAGR of 9% from 2010 to 2020. The same was up 9.3% year over year in first-quarter 2021, courtesy of strength at the Critical Illness Recovery and Rehabilitation hospitals. Patient volumes are rising after remaining under pressure last year. This upside will aid revenues in turn.

Impressive Bottom Line: Along with a consistent top-line performance, the company’s bottom line did well too. Its earnings per share witnessed a CAGR of 14.6% from 2010 to 2020. This vouches for the company’s operational excellence. We believe that the company will be able to effectively manage its cost and deliver earnings growth.

Favorable Cash Flows: The company is constantly generating favorable adjusted cash flow from operations, which has been increasing consistently since 2017. The first quarter of 2021 also witnessed the metric rising more than five-fold year over year. This, in turn, has been helping it generate sufficient financial flexibility over time, enabling sufficient deployment of funds in the business. The company expects to generate free cash flows in the range of $450-$500 million a year.
 

Upbeat Guidance: Select Medical updated its business outlook for 2021. It expects full-year revenues in the $5.7-$5.9 billion range, higher than the prior guidance of $5.65-$5.85 billion band (indicating 5.5% growth from the 2020 reported figure). Adjusted EBITDA is forecast between $870 million and $900 million, up from the prior guidance of $840-$880 million (suggesting 10.5% growth from the 2020 reported figure). Earnings per common share are anticipated within $2.41-$2.58, above the previous guidance of $2.26-$2.48 (implying 29.3% jump from the prior-year reported number).

For the 2021-2023 time period, Select Medical is targeting a revenue CAGR of 4-6%, adjusted EBITDA in the 7-8% band and an EPS within 17-20%. Strong guidance instills investors’ confidence in the stock.
Consistent ROE:  The company generated stability in its return on equity (ROE), which improved markedly from 2017 to 2020. As of Mar 31, 2021, its trailing 12-month ROE of 25.2% is higher than the industry’s ROE of 22.9%, reflecting its tactical efficiency in utilizing shareholders’ funds.

Other Stocks in the Healthcare Space

Other stocks in the healthcare space include Magellan Health, Inc. (MGLN - Free Report) , The Joint Corp. (JYNT - Free Report) and UnitedHealth Group Inc. (UNH - Free Report) . All stocks presently carry the same bullish Zacks Rank as Select Medical.
For 2021, earnings at UnitedHealthcare, The Joint Corp. and Magellan Health are expected to grow 10.25%, 26.67% and 357.14%, respectively.

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