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Encompass Health (EHC) to Spin Off Home Health & Hospice Unit

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Encompass Health Corporation (EHC - Free Report) recently announced that it intends to spin off home health and hospice business to form an independent company. The move is expected to improve strategic and operational flexibility of both the businesses. The new company will be named Enhabit Home Health & Hospice and will be publicly traded. Shareholders of EHC will likely own shares in both the companies. The transaction is expected to be tax free for shareholders.

Encompass Health acquired 83.3% of the home health and hospice business through the EHHI Holdings, Inc. buyout on Dec 31, 2014. EHC’s home health and hospice unit is the nation’s fourth-largest provider of Medicare-certified skilled home health services in terms of revenues. Its services comprise skilled nursing, physical, occupational and speech therapy, medical social work plus home health aide services. The COVID-19 pandemic significantly affected the unit last August. Adjusted EBITDA plunged 10.4% year over year to $46.4 million in the third quarter due to pandemic-linked headwinds, resulting in reduced volumes and higher costs.

Encompass Health expects the spinoff to be completed in first-half 2022 as the rebranding process will start in mid-April. The move will allow the respective managements to optimize their businesses individually and provide equity currency of their own. Enhabit is present in 347 locations in 35 states in the United States.

EHC announced in 2020 that it was exploring strategic alternatives for disposing of the home health and hospice business. With the spin-off of this unit, the company is likely to focus and grow its core business — inpatient rehabilitation, which is set to witness consistent growth backed by planned bed additions at a number of existing hospitals, acquisitions and construction of new hospitals.

A similar move was taken by The Ensign Group, Inc. (ENSG - Free Report) in 2019. The company separated home health and hospice business and all senior living operations from the Ensign Group into a separate publicly-traded entity, The Pennant Group, Inc. (PNTG - Free Report) . Pennant Group’s third-quarter performance was also affected by a surge in COVID-19 cases.

Price Performance

Shares of Encompass Health have declined 29.3% in the past year compared with the 49.5% fall of the industry it belongs to.

Zacks Investment ResearchImage Source: Zacks Investment Research

Zacks Rank and Key Pick

The company currently has a Zacks Rank #4 (Sell). A better-ranked stock in the medical space is Globus Medical, Inc. (GMED - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Globus Medical develops healthcare solutions for patients with musculoskeletal disorders. GMED also provides products for orthopedic trauma treatments. The medical device company’s bottom line for 2021 is expected to jump 40.3% from the year-ago figure. Audubon, PA-based Globus Medical has witnessed no movement in estimate revisions in the past few weeks. Globus Medical beat earnings estimates in each of the last four quarters, with the average being 21.4%.