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Why Seasoned Investors are Retaining Select Medical (SEM) Stock

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Select Medical Holdings Corporation (SEM - Free Report) is well-poised to grow on the back of strategic acquisitions and partnerships with large healthcare systems. Its diversified business and growing patient admissions bode well.

Select Medical — with a market cap of $3.8 billion — is a healthcare company with multiple long-term acute care and inpatient rehabilitation hospitals, as well as occupational health and physical therapy clinics. It has operations in 46 states and in the District of Columbia.

Courtesy of solid prospects, this Zacks Rank #3 (Hold) stock is worth holding on to at the moment.

Rising Estimates

The Zacks Consensus Estimate for Select Medical’s 2021 earnings is pegged at $3.05 per share, indicating a 61.4% year-over-year rise. The company beat earnings estimates in each of the last four quarters, the average surprise being 69.2%.

The consensus estimate for 2021 revenuesstands at $6.2 billion, suggesting a 11.4% rise.

VGM Score

Along with the Zacks Rank #3, the company currently has a VGM Score of B. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 offer the best investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Growth Drivers

Select Medical is well-positioned to benefit from rising demand for medical services owing to an aging population, which will drive growth across its business segments. Also, the rising incidence of diseases is resulting in an increase in the number of patient admissions. The company is focused on making strategic acquisitions to boost its business through inorganic growth. It is poised to capitalize on consolidation opportunities within each of its business segments, which operate in a highly fragmented market and selectively augment the company’s internal growth. Realizing efficiencies from its centralized operations and management is crucial to its businessgrowth.

Over the 2021-2023 forecast period, SEM’s long-term guidance for sales, adjusted EBITDA and earnings per common share were flat with the prior outlook. The company is targeting a revenue CAGR of 4-6%, adjusted EBITDA in the 7-8% band and EPS within 17-20%. Solid guidance instills investors’ confidence in the stock.

Select Medical teams up with large healthcare systems to provide post-acute care services. It offers operating expertise to these ventures through its experience in running critical illness recovery hospitals, rehabilitation hospitals and outpatient rehabilitation facilities. Alliances with other healthcare entities are helping the company augment its top line. The metric was up 14.1% year over year in the first nine months of 2021.

Key Concerns

However, there are a few factors that are impeding the growth of the stock lately.

Its high debt burden in concerning. SEM’s net debt-to-capital is 55.9%, much higher than the industry’s average of 19.1%. At the third quarter-end, Select Medical had cash and cash equivalents of only $748 million, while long-term debt, net of current portion, amounted to $3.4 billion. This can affect its financial flexibility. Also, increasing costs are eating into its profits. Its total costs and expenses in the first nine months of 2021 were $4,142.3 million, up 11.3% from the year-ago period. Nevertheless, we believe that a systematic and strategic plan of action will drive its long-term growth.

Better Ranked Players

Some better-ranked stocks in the medical space are Co-Diagnostics, Inc. (CODX - Free Report) , HealthEquity, Inc. (HQY - Free Report) and Harrow Health, Inc. (HROW - Free Report) , each carrying a Zacks Rank #2.

Salt Lake City, UT-based Co-Diagnostics provides a wide range of testing services to customers. Its joint venture CoSara in India is likely to have boosted its addressable market size. Also, Co-Diagnostics’ Logix Smart™ ABC test received a green signal from the Mexican watchdogs. Deals like these will keep strengthening its client base around the world.

The molecular diagnostics company’s bottom line for 2021 has witnessed one upward estimate revision in the past 30 days and no movement in the opposite direction. During this time period, Co-Diagnostics’ earnings estimates have risen 17.9%. CODX beat earnings estimates thrice in the last four quarters and missed once, the average surprise being 35.6%.

Headquartered in Draper, UT, HealthEquity is engaged in a series of buyouts and collaborations over the past few months. The company, in April, entered into a definitive agreement with Fifth Third Bank, National Association to transition custodianship of Fifth Third’s Health Savings Accounts portfolio to HealthEquity.

HQY’s bottom line for current year has witnessed one upward estimate revision in the past 30 days and no movement in the opposite direction. HealthEquity beat earnings estimates in each of the past four quarters, the average surprise being 13.3%.

Based in San Diego, CA, Harrow Health is an ophthalmic-focused healthcare firm. Its recent acquisitions of ophthalmic surgical drug candidates from Sintetica and Wakamoto Pharmaceutical are major positives. Moves like these are likely to bolster Harrow Health’s commercial success in the U.S. and Canadian markets.

Harrow Health’s bottom line for 2021 is expected to soar 346.2% year over year. It has witnessed one upward estimate revision in the past 30 days and no movement in the opposite direction. HROW beat earnings estimates thrice in the past four quarters and missed once, the average surprise being 38%.