The healthcare player, Select Medical Holdings Corporation SEM, has seen its shares jump 50.2% in the year-to-date period, outpacing the industry’s 47% growth. The company also outperformed the broader S&P 500 Index’s return of 18.1%. Currently trading at $35.30, SEM's price is nearing the upper end of its 52-week range of $21.28 to $40.50.
Given this performance so far, can investors still consider holding on to Select Medical stock, or should you book profits?
SEM’s YTD Price Performance
Image Source: Zacks Investment Research
The stock is currently trading below its 50-day moving average, signaling potential downward momentum. Let’s delve deeper.
What’s Dragging Down SEM Stock?
Select Medical's profitability is being impacted by rising costs and expenses. In 2021, 2022 and 2023, costs and expenses rose 11.5%, 5.8% and 2.5%, respectively. The first half of 2024 saw a further 5.6% rise due to the higher cost of services. We anticipate a more than 4% year-over-year rise in overall costs this year. This trend is likely to put pressure on its profit margins.
SEM engages in acquisitions to drive growth and boost volumes. However, its return on invested capital is 6.1%, lower than the industry average of 10.6%, indicating less efficient capital utilization.
Select Medical faces challenges with high leverage, which can affect its inorganic growth strategy. The company's net debt-to-capital ratio stands at a substantial 67%, far exceeding the industry average of 21.7%. As of June 30, 2024, its long-term debt (net of current portions) totaled $3.6 billion, while its cash and cash equivalents were just $111.2 million.
From a valuation perspective, SEM appears not so cheap. The company is trading at a forward 12-month price-to-earnings multiple of 16.21X, higher than its five-year median of 12.99X and almost touching its industry’s average of 16.59X, indicating limited growth potential.
Estimate Revision Not Favoring SEM Stock
Reflecting the negative sentiment around Select Medical now, the Zacks Consensus Estimate for earnings per share has seen downward revisions. The consensus estimate for current-quarter adjusted earnings for SEM is currently pegged at 41 cents per share, indicating a 10.9% year-over-year decline. The consensus mark for next quarter’s earnings suggests a further 13.9% fall.
Image Source: Zacks Investment Research
Some Tailwinds for SEM
Although the higher utilization will push costs upward, increasing admissions and patient days will keep its revenues growing. Its Rehabilitation Hospital unit is gaining from this. Overall, the company is facing rising demand for its services. It plans to add 449 additional beds by 2026, which will address the demand and boost volumes.
Final Verdict: Steer Clear of SEM
The negative sentiment surrounding the stock is quite evident, with earnings per share estimates for SEM moving south due to the reasons mentioned above. Investors have valid reasons to be cautious about the stock at this time. There is significant doubt about whether SEM's difficulties will improve in the near future. With a Zacks Rank #4 (Sell), the stock appears to be a risky investment at present.
Better-Ranked Players
Investors can look at some better-ranked stocks in the broader Medical space, like Universal Health Services, Inc. UHS, Tenet Healthcare Corporation THC and CareDx, Inc. CDNA. While Universal Health and Tenet Healthcare each currently sport a Zacks Rank #1 (Strong Buy), CareDx carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Universal Health Services’ 2024 bottom line suggests 51% year-over-year growth. UHS witnessed seven upward estimate revisions over the past 60 days against no movement in the opposite direction. It beat earnings estimates in each of the last four quarters, with the average surprise being 14.6%.
The Zacks Consensus Estimate for Tenet Healthcare’s 2024 bottom line is pegged at $10.72 per share, which indicates 53.6% growth from a year ago. During the past 60 days, THC witnessed seven upward estimate revisions against none in the opposite direction. It beat earnings estimates in each of the last four quarters, with the average surprise being 58.5%.
The Zacks Consensus Estimate for CareDx’s current-year earnings implies a 140.6% improvement from the year-ago reported figure. CDNA beat earnings estimates in each of the last four quarters, with an average surprise of 114.6%. The consensus mark for its current-year revenues is pegged at $324.5 million, which indicates a 15.7% year-over-year increase.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
