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5 Reasons That Make Encompass Health (EHC) an Attractive Bet

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Encompass Health Corp. (EHC - Free Report) is poised to grow on the back of an ageing population, which should spur long-term demand for the services provided by the company. It is the largest owner and operator in the inpatient rehabilitation space, the fourth largest operator in the home health space and the 11th largest in the hospice space.

The stock currently has a Zacks Rank #2 (Buy) and an impressive  VGM Score of B. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1 (Strong Buy) or 2 or 3 (Hold) offer the best investment opportunities. 

You can see the complete list of today’s Zacks #1 Rank stocks here.

Factors That Make the Stock Look Attractive

Solid Expansion Plans: The company is making efforts to expand its market share. It plans to open six additional hospitals in 2021 and add more than 100 beds to the existing chain of hospitals. For 2022, the company plans to open at least 12 hospitals. With a strong development pipeline, the company is expected to come up with more growth-related announcements throughout 2021. Its strategy is to open six to 10 hospitals every year.

The inpatient rehabilitation industry remains highly fragmented, which gives the company an edge to tap this market. Other players dominating the US post-acute care market are DaVita Inc. (DVA - Free Report) , Amedisys, Inc. (AMED - Free Report) and LHC Group, Inc. (LHCG - Free Report) among others.

Favorable Guidance: Based on strong first-quarter 2021 results and the extension of Medicare sequestration suspension to the end of 2021, the company raised its full-year revenue and earnings guidance. For 2021, net operating revenues are projected within $5.06-$5.23 billion, higher than the prior projection of $5-$5.17 billion. The midpoint of the latest guidance suggests growth of 10.8% from the 2020 reported level.

Adjusted earnings per share from continuing operations are anticipated in the $3.94-$4.16 band for 2021, up from the previous forecast of $3.31-$3.53. The midpoint of the updated view indicates a 40.1% surge from the 2020 reported figure.

Strong Cash Flows: Encompass Health’s favorable cash flow generation will boost its growth initiatives. In 2020, the company’s adjusted free cash flow grew 12.3%. The company expects the same to see a CAGR of 5-7% from 2020 to 2025.

Stable Dividend Payments: The company’s dividend was hiked from 72 cents in 2013 to the recently paid out annual amount of $1.12 per share, which implies 5.7% growth per annum, on average. Its low payout ratio and decent growth indicate that the company is reinvesting profits in its business. This should pave the way for more dividend raises in the future.

Attractive Valuation: From a valuation perspective, it is trading at low levels. Its P/EBITDA (TTM) of 9.89X is lower than the industry’s average of 16.3X.
In the past month, the stock has decreased 5.5% compared with the industry’s decline of 0.3%. This fall gives a good entry point for investors to buy the stock and reap considerable returns when the share price rises.

Zacks Investment ResearchImage Source: Zacks Investment Research

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In-Depth Zacks Research for the Tickers Above


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Amedisys, Inc. (AMED) - free report >>

DaVita Inc. (DVA) - free report >>

LHC Group, Inc. (LHCG) - free report >>

Encompass Health Corporation (EHC) - free report >>