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Why Is Encompass Health (EHC) Up 7.5% Despite Q3 Earnings Miss?
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Encompass Health Corporation’s (EHC - Free Report) shares rose 7.5% since it reported earnings on Oct 26, 2022. Even though it reported weak third-quarter earnings, investors might have been optimistic about its higher revenue guidance.
The streamlined business’ cash flow generation guidance, despite multiple headwinds, seems impressive. Its long-term view for business growth is commendable.
Let’s delve deeper.
Q3 Results
EHC delivered third-quarter 2022 adjusted earnings of 67 cents per share, which missed the Zacks Consensus Estimate by a penny. The bottom line declined 11.8% year over year.
Encompass Health’s net operating revenues increased 7.8% year over year to $1,089.5 million in the third quarter. The top line beat the consensus mark of $1,061 million.
The weak third-quarter earnings were caused by rising operating expenses, staffing challenges and higher utilization. The negatives were partially offset by favorable volumes and pricing.
Encompass Health Corporation Price, Consensus and EPS Surprise
Net patient revenues per discharge witnessed a 0.7% year-over-year increase, primarily resulting from increased reimbursement rates. This was partially offset by the resumption of sequestration. Increased volumes supported its revenue growth. Total discharges grew 7.5% year over year.
Total operating expenses of $941.1 million increased from $844 million a year ago due to higher salaries and benefits, supplies and other operating costs. Hospital operating expenses for the third quarter were at $236.6 million, up from $217.6 million a year ago.
Net and comprehensive income declined to $67 million from $126.7 million a year ago.
Adjusted EBITDA of $195.3 million declined 2% year over year in the quarter under review, due to higher staffing costs.
EHC completed the spin-off of its home health and hospice business into an independent company on Jul 1, 2022. The new entity is named Enhabit, Inc. (EHAB - Free Report) . With the spin-off of this unit, the company plans to focus on and grow its core business, Inpatient Rehabilitation. Encompass Health reports Enhabit’s historical results in discontinued operations.
Financial Update (as of Sep 30, 2022)
Encompass Health exited third-quarter 2022 with cash and cash equivalents of $59.8 million, up from the 2021-end figure of $49.4 million. Total assets of $5,475.9 million decreased from $6,864.9 million in 2021 end.
Its long-term debt, net of current portion, totaled $2,719 million, which dropped from $3,240.5 million as of Dec 31, 2021. The current portion of long-term debt was recorded at $26.2 million.
Net operating cash flow was recorded at $70.1 million in the third quarter of 2022, down from $177.6 million a year ago. Adjusted free cash flow was at $26.6 million compared with $87.7 million a year ago.
2022 Outlook
EHC provided revised guidance for its businesses.
This year, management anticipates net operating revenues within $4,320-$4,350 million, up from the previous range of $4,250-$4,300 million, and $4,015 million in 2021. However, adjusted EBITDA is projected in the range of $800-$820 million, down from the previous range of $820-$840 million compared with $817 million a year ago.
Adjusted earnings per share from continuing operations are forecast between $2.71 and $2.86 for the current year, down from the previous estimate of $2.77-$2.91 and the reported figure of $2.93 in 2021.
Adjusted free cash flow for 2022 is expected within $315-$385 million compared with $330.2 million in 2021. It expects the tax rate to be around 26%. Diluted shares are likely to be around 100.4 million. The company has around $198 million left under its share buyback program.
Encompass Health intends to open 6-10 de novo locations and increase the bed count by 100-150 per annum, in the 2022-2026 period.
The Zacks Consensus Estimate for Elevance Health’s earnings is currently pegged at $28.92 per share, indicating a year-over-year increase of 11.3%. ELV beat earnings estimates in all the past four quarters, with an average surprise of 4.1%.
The Zacks Consensus Estimate for Inventiva’s 2022 bottom line indicates an 11.3% year-over-year improvement. IVA has witnessed two upward estimate revisions in the past 60 days against none in the opposite direction.
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Why Is Encompass Health (EHC) Up 7.5% Despite Q3 Earnings Miss?
Encompass Health Corporation’s (EHC - Free Report) shares rose 7.5% since it reported earnings on Oct 26, 2022. Even though it reported weak third-quarter earnings, investors might have been optimistic about its higher revenue guidance.
The streamlined business’ cash flow generation guidance, despite multiple headwinds, seems impressive. Its long-term view for business growth is commendable.
Let’s delve deeper.
Q3 Results
EHC delivered third-quarter 2022 adjusted earnings of 67 cents per share, which missed the Zacks Consensus Estimate by a penny. The bottom line declined 11.8% year over year.
Encompass Health’s net operating revenues increased 7.8% year over year to $1,089.5 million in the third quarter. The top line beat the consensus mark of $1,061 million.
The weak third-quarter earnings were caused by rising operating expenses, staffing challenges and higher utilization. The negatives were partially offset by favorable volumes and pricing.
Encompass Health Corporation Price, Consensus and EPS Surprise
Encompass Health Corporation price-consensus-eps-surprise-chart | Encompass Health Corporation Quote
Performance
Net patient revenues per discharge witnessed a 0.7% year-over-year increase, primarily resulting from increased reimbursement rates. This was partially offset by the resumption of sequestration. Increased volumes supported its revenue growth. Total discharges grew 7.5% year over year.
Total operating expenses of $941.1 million increased from $844 million a year ago due to higher salaries and benefits, supplies and other operating costs. Hospital operating expenses for the third quarter were at $236.6 million, up from $217.6 million a year ago.
Net and comprehensive income declined to $67 million from $126.7 million a year ago.
Adjusted EBITDA of $195.3 million declined 2% year over year in the quarter under review, due to higher staffing costs.
EHC completed the spin-off of its home health and hospice business into an independent company on Jul 1, 2022. The new entity is named Enhabit, Inc. (EHAB - Free Report) . With the spin-off of this unit, the company plans to focus on and grow its core business, Inpatient Rehabilitation. Encompass Health reports Enhabit’s historical results in discontinued operations.
Financial Update (as of Sep 30, 2022)
Encompass Health exited third-quarter 2022 with cash and cash equivalents of $59.8 million, up from the 2021-end figure of $49.4 million. Total assets of $5,475.9 million decreased from $6,864.9 million in 2021 end.
Its long-term debt, net of current portion, totaled $2,719 million, which dropped from $3,240.5 million as of Dec 31, 2021. The current portion of long-term debt was recorded at $26.2 million.
Net operating cash flow was recorded at $70.1 million in the third quarter of 2022, down from $177.6 million a year ago. Adjusted free cash flow was at $26.6 million compared with $87.7 million a year ago.
2022 Outlook
EHC provided revised guidance for its businesses.
This year, management anticipates net operating revenues within $4,320-$4,350 million, up from the previous range of $4,250-$4,300 million, and $4,015 million in 2021. However, adjusted EBITDA is projected in the range of $800-$820 million, down from the previous range of $820-$840 million compared with $817 million a year ago.
Adjusted earnings per share from continuing operations are forecast between $2.71 and $2.86 for the current year, down from the previous estimate of $2.77-$2.91 and the reported figure of $2.93 in 2021.
Adjusted free cash flow for 2022 is expected within $315-$385 million compared with $330.2 million in 2021. It expects the tax rate to be around 26%. Diluted shares are likely to be around 100.4 million. The company has around $198 million left under its share buyback program.
Encompass Health intends to open 6-10 de novo locations and increase the bed count by 100-150 per annum, in the 2022-2026 period.
Zacks Rank & Key Picks
Encompass Health currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader medical space are Elevance Health Inc. (ELV - Free Report) and Inventiva S.A. (IVA - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Elevance Health’s earnings is currently pegged at $28.92 per share, indicating a year-over-year increase of 11.3%. ELV beat earnings estimates in all the past four quarters, with an average surprise of 4.1%.
The Zacks Consensus Estimate for Inventiva’s 2022 bottom line indicates an 11.3% year-over-year improvement. IVA has witnessed two upward estimate revisions in the past 60 days against none in the opposite direction.