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Select Medical Holdings Corp. (SEM) is a healthcare company that owns and operates critical illness recovery hospitals, rehabilitation hospitals, and outpatient rehabilitation clinics across 46 states. 

Like many other healthcare stocks, SEM underperformed during the initial phases of the coronavirus due to lockdowns and restrictions on all medical care other than critical care. This resulted in the company’s first revenue decline every quarter since the Great Recession.

However, there’s been a steady improvement for SEM as these restrictions have been lifted. Growth resumed its positive trend with sales increasing by 2% and 6% in Q2 and Q3 of 2020. In 2021, analysts are forecasting $5.8 billion in sales which would be an 8% improvement from 2020.

Investors should take advantage of this opportunity to pick up shares in SEM as it’s attractively priced with strong growth prospects. In its last quarter, the company reached a new record in terms of earnings per share, although revenue remains slightly off pre-pandemic levels. Further, the aging population and constant increase in healthcare spending will drive future earnings growth.

Select Medical Profile

SEM was founded in 1996 by two brothers – Rocco and Robert Ortenzio. It started as a regional provider of outpatient physical rehabilitation and quickly expanded into offering long-term acute care and contract therapy. Soon, it bought NovaCare Physical Rehabilitation and Occupational Health which turned it from a regional company into a national one. 

It went public in 2001. The company has continued to grow via acquisitions such as the Kessler Kessler Institute for Rehabilitation, adding inpatient medical rehabilitation to its offerings. It also continues to grow through joint ventures and partnerships. 

Overall, SEM has four areas of expertise: critical illness recovery, inpatient medical rehabilitation, outpatient physical therapy and occupational medicine and a total of 46,000 health care professionals in 46 states. 

Growth Story

SEM should be attractive to growth investors for several reasons. For one, healthcare spending continually trends higher in the US due to the aging population and rising cost of care. Second, SEM is likely to benefit from the short-term catalyst of the economies reopening as people’s behavior returns to normal and restrictions on gatherings will be lifted. Third, the company has shown the ability to consistently grow via acquisitions and partnerships.

These efforts have translated into the company growing revenue from $2.8 billion in 2010 to $5.5 billion in 2020. And, analysts see this steady pace of revenue growth continuing in 2021 and 2022 with forecasts of $5.8 billion and $6 billion in full year revenue, respectively.

Value Opportunity

Typically, stocks like SEM have a higher multiple due to its track record of consistent growth and moat around its business. There’s little near-term risk of disruption especially considering the underlying trends fueling demand for healthcare.

However, SEM is an exception as it has a forward price -to-earnings ratio (P/E) of 12.5. This is significantly cheaper than its peers and to the broad market as the S&P 500 has a forward PE of 24. Wall Street analysts are also bullish on the stock as it has a $38 price target which implies 10% upside. These analysts have also been getting more bullish in the past month as it has received 4 upgrades, with earnings being revised from $0.39 per share to $0.61 per share.

POWR Ratings

The combination of steady growth and tantalizing value has resulted in a B grade from the POWR Ratings service, which equates to a Buy. This grade is calculated by weighting 118 different factors.  Over the last 20 years, B-rated stocks have generated a compound annual return of 19.7%. So, it makes sense that only a select group of stocks qualify for this grade. 

The POWR Ratings also assess stocks according to different components and industry conditions.  SEM has a Stability grade of B which is consistent with its long-term track record of growth regardless of economic conditions. The disruptions when growth did slow served as opportune times to add exposure. They also merit a higher multiple for the stock. 

Click here to access SEM’s POWR ratings for Value, Growth, Quality, Momentum, and Sentiment.

SEM is ranked #4 of 10 stocks in the Medical – Hospitals industry.  This industry is graded an A due to the improving outlook for hospitals and underlying, supportive fundamentals due to rising healthcare costs. There are several other top-rated stocks in the same industry. Click here to access them.

Conclusion

The bull case for SEM is quite simple. It is a high-quality operator in a field where demand is constantly rising. Currently, shares are quite cheap especially on a forward basis considering its more than 10% revenue growth in the coming years.

Unlike many growth stocks, SEM’s revenues have much less chance of disruption. Further, it’s demonstrated the ability to constantly grow vertically and horizontally which means it will continue to add more locations and enter new segments.

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SEM shares were trading at $34.21 per share on Friday afternoon, down $0.34 (-0.98%). Year-to-date, SEM has gained 23.68%, versus a 5.12% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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