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Select Medical Revokes Full-Year View Amid Coronavirus Blues

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Grappled with the uncertainty related to the coronavirus breakout, Select Medical Holdings Corporation (SEM - Free Report) has withdrawn its earlier-provided guidance for 2020.

The company’s 2020 net operating revenues were expected in the range of $5.575-$5.675 billion (up 3.2% year over year), adjusted EBITDA between $725.0 million and $760.0 million (up 4.4% year over year) and diluted earnings per common share in the $1.27-$1.46 (up 8.9% year over year) band.

Select Medical has been performing impressively over the past many years, evident from its revenue CAGR of 12.2% from 2014 to 2019. It also witnessed adjusted EBITDA CAGR of 14.3%. Further, the company reported a free cash flow of $288 million which was, however, down 13.5% year over year. The company’s free cash flow per share of $1.74 is better than the industry average of $1.22.

However, its high-debt level in its capital structure raises a concern. Its net debt-to-capital is 80.2%, much higher than the industry’s average of 24.8%. Also, its interest coverage ratio of 2.32 times is much lower than its industry average of 10.73 times.  

Select Medical operates the majority of its critical illness recovery hospitals as a hospital within a hospital (an HIH).  As an HIH, it typically leases space from a general acute care hospital or “host hospital” and operates as a separately-licensed hospital within the host hospital.  Patients suffering chronic critical illness are typically admitted to the company’s critical illness recovery hospitals from general acute care hospitals and are likely to stay in a unit similar to intensive care. Now since the number of admissions at hospitals fell significantly following the postponement of elective procedures to accommodate any potential spike in the COVID-19 cases, the supply of business to Select Medical naturally took a big hit.

Select Medical is one of the largest providers of post-acute care, operating 101 critical illness recovery hospitals across 28 states. It enters the list of other hospitals in the United States that discarded their earnings guidance due to business disruption from the COVID-19 breakout. It won’t be much of a surprise to see aggressive cost-cutting efforts from Select Medical in order to preserve its margins.

Year to date, the stock has lost 8.6% compared with its industry's decline of 27.3%.

Most recently, Tenet Healthcare Corporation (THC - Free Report) and MEDNAX Inc. (MD - Free Report) scrapped their 2020 earnings outlook.  

Moreover, leading hospital company HCA Healthcare, Inc. (HCA - Free Report) laid off some of its employees and slashed wages to control costs.

The COVID-19 pandemic is anticipated to deal a significant blow to the hospital industry that has been hugely cash-strapped and debt-ridden.
Select Medical carries a Zacks Rank #3 (Hold).

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

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