Encompass Health Corporation (EHC) Bundle
Understanding Encompass Health Corporation (EHC) Revenue Streams
Understanding Encompass Health Corporation’s Revenue Streams
Encompass Health Corporation's revenue is primarily derived from its inpatient rehabilitation hospitals and outpatient services. The breakdown of these revenue sources is as follows:
| Revenue Source | Q3 2024 Revenue (in Millions) | Q3 2023 Revenue (in Millions) | Year-over-Year Growth (%) |
|---|---|---|---|
| Inpatient Services | 1,316.2 | 1,180.5 | 11.5 |
| Outpatient and Other | 34.8 | 26.4 | 31.8 |
| Total Net Operating Revenues | 1,351.0 | 1,206.9 | 11.9 |
The year-over-year revenue growth rate for the nine months ended September 30, 2024, was also notable:
| Revenue Source | 9M 2024 Revenue (in Millions) | 9M 2023 Revenue (in Millions) | Year-over-Year Growth (%) |
|---|---|---|---|
| Inpatient Services | 3,864.4 | 3,477.0 | 11.1 |
| Outpatient and Other | 103.8 | 77.4 | 34.1 |
| Total Net Operating Revenues | 3,968.2 | 3,554.4 | 11.6 |
In terms of contribution from different business segments, the inpatient segment continues to be the largest revenue generator, accounting for approximately 97.4% of total revenues in Q3 2024. The outpatient segment has shown significant growth, marking a 31.8% increase year-over-year, indicating a shift towards more outpatient services.
Furthermore, the number of discharges and patient volume metrics indicate robust operational performance:
| Metric | Q3 2024 | Q3 2023 | Year-over-Year Change (%) |
|---|---|---|---|
| Discharges | 62,715 | 57,665 | 8.8 |
| Net Patient Revenue per Discharge | 20,987 | 20,472 | 2.5 |
| Occupancy Rate (%) | 75.4 | 72.8 | 3.6 |
Significant changes in revenue streams include the increase in provider tax revenues, which contributed an additional $7.9 million and $25.1 million for Q3 and the nine months ended September 30, 2024, respectively. This was partially offset by increased provider tax expenses, which amounted to $4.5 million and $11.8 million for the same periods.
The overall financial health of the company remains strong, with net income attributable to the company for Q3 2024 reported at $108.2 million, up from $85.3 million in Q3 2023, reflecting a growth of 26.8%.
A Deep Dive into Encompass Health Corporation (EHC) Profitability
Profitability Metrics
Gross Profit Margin: For the nine months ended September 30, 2024, gross profit was approximately $1,631.2 million, resulting in a gross profit margin of 41.0%. This is compared to a gross profit of $1,469.9 million and a margin of 41.3% for the same period in 2023.
Operating Profit Margin: Operating income for the nine months ended September 30, 2024 was $632.2 million, yielding an operating profit margin of 15.9%, up from $528.1 million and a margin of 14.9% in 2023.
Net Profit Margin: The net income attributable to common shareholders for the nine months ended September 30, 2024 was $332.8 million, resulting in a net profit margin of 8.4%, compared to $264.4 million and a margin of 7.4% in 2023.
| Metric | 2024 (9 Months) | 2023 (9 Months) | Change (%) |
|---|---|---|---|
| Gross Profit Margin | 41.0% | 41.3% | -0.73% |
| Operating Profit Margin | 15.9% | 14.9% | 6.71% |
| Net Profit Margin | 8.4% | 7.4% | 13.51% |
Trends in Profitability Over Time
Net operating revenues for the nine months ended September 30, 2024, reached $3,968.2 million, reflecting an increase of 11.6% compared to $3,554.4 million in 2023. The growth in revenues was driven by an increase in inpatient discharges, which rose by 8.5% year-over-year.
Operating expenses increased to $3,336.0 million for the nine months ended September 30, 2024, compared to $3,012.5 million in 2023, marking an increase of 10.7%. However, the rise in revenues outpaced the growth in operating expenses, leading to improved operating and net profit margins.
Comparison of Profitability Ratios with Industry Averages
The industry average gross profit margin for healthcare services is typically around 40%, positioning the company slightly above this benchmark at 41.0%. The operating profit margin in the healthcare sector averages about 15%, indicating that the company's 15.9% margin is in line with industry standards. The net profit margin for healthcare services averages around 7%, showing the company’s performance at 8.4% exceeds industry norms.
Analysis of Operational Efficiency
Cost management has improved, with salaries and benefits constituting 54.0% of net operating revenues for the nine months ended September 30, 2024, down from 54.1% in the previous year. Other operating expenses have remained stable at 15.0% of net revenues.
The following table summarizes key operational metrics:
| Operational Metric | Q3 2024 | Q3 2023 |
|---|---|---|
| Salaries and Benefits (% of Revenue) | 54.0% | 54.1% |
| Other Operating Expenses (% of Revenue) | 15.0% | 15.2% |
| Total Operating Expenses (% of Revenue) | 84.5% | 85.1% |
Overall, the company has successfully managed its operational costs while increasing revenues, which has positively impacted its profitability metrics and margins in 2024.
Debt vs. Equity: How Encompass Health Corporation (EHC) Finances Its Growth
Debt vs. Equity: How Encompass Health Corporation Finances Its Growth
The financial structure of Encompass Health Corporation incorporates a strategic balance between debt and equity, which is essential for supporting its growth initiatives. Below is a detailed breakdown of the company's debt levels, its debt-to-equity ratio, recent debt activities, and how it manages its financing.
Overview of the Company's Debt Levels
As of September 30, 2024, Encompass Health Corporation reported total liabilities amounting to $3,732.8 million. This includes:
- Long-term debt: $2,344.5 million (net of current portion)
- Current portion of long-term debt: $233.0 million
The company also holds various senior notes, including:
- 5.75% Senior Notes due 2025: $199.5 million
- 4.50% Senior Notes due 2028: $787.5 million
- 4.75% Senior Notes due 2030: $783.5 million
- 4.625% Senior Notes due 2031: $392.3 million
- Other notes payable: $90.7 million
Debt-to-Equity Ratio and Comparison to Industry Standards
The debt-to-equity ratio for Encompass Health stands at 0.88 as of September 30, 2024, calculated as follows:
| Total Debt (Long-term + Current) | Shareholders' Equity | Debt-to-Equity Ratio |
|---|---|---|
| $2,577.5 million | $2,669.1 million | 0.88 |
This ratio is below the industry average of 1.0, indicating a relatively lower level of debt compared to equity within the sector.
Recent Debt Issuances, Credit Ratings, or Refinancing Activity
In August 2024, the company redeemed $150 million of its 5.75% Senior Notes due 2025 using cash on hand. Additionally, on October 22, 2024, it issued a notice for redemption of $100 million of the outstanding principal balance of the same notes, with a planned redemption date of November 21, 2024.
As of September 30, 2024, Encompass Health maintained a credit rating of BB from S&P Global Ratings, which reflects the company's stable outlook despite the high level of debt.
Balancing Between Debt Financing and Equity Funding
Encompass Health primarily finances its growth through a combination of debt and equity. In the nine months ended September 30, 2024, the company reported capital expenditures of approximately $444 million. For 2024, it expects to allocate between $595 million to $625 million for capital expenditures.
The company has declared dividends of $0.17 per share in October 2024, emphasizing its commitment to returning capital to shareholders while managing its debt levels.
Overall, Encompass Health’s strategic use of debt allows it to leverage growth opportunities while maintaining a prudent approach to its capital structure.
Assessing Encompass Health Corporation (EHC) Liquidity
Assessing Encompass Health Corporation's Liquidity
Current Ratio: As of September 30, 2024, the current ratio is calculated as follows:
| Current Assets (in millions) | Current Liabilities (in millions) | Current Ratio |
|---|---|---|
| $933.9 | $897.4 | 1.04 |
Quick Ratio: The quick ratio, which excludes inventory from current assets, is:
| Quick Assets (in millions) | Current Liabilities (in millions) | Quick Ratio |
|---|---|---|
| $933.9 - Inventory | $897.4 | 1.04 |
Working Capital Trends: Working capital as of September 30, 2024 is:
| Working Capital (in millions) |
|---|
| $36.5 |
Cash Flow Statements Overview:
- Operating Cash Flow: For the nine months ended September 30, 2024, net cash provided by operating activities was $724.0 million.
- Investing Cash Flow: Cash used in investing activities was ($443.8 million).
- Financing Cash Flow: Cash used in financing activities was ($246.0 million).
Potential Liquidity Concerns or Strengths:
- As of September 30, 2024, cash and cash equivalents stood at $147.8 million.
- Restricted cash amounted to $51.1 million.
- Available capacity under the revolving credit facility was approximately $964 million.
Debt Information:
| Debt Type | Amount (in millions) |
|---|---|
| 5.75% Senior Notes due 2025 | $199.5 |
| 4.50% Senior Notes due 2028 | $787.5 |
| 4.75% Senior Notes due 2030 | $783.5 |
| 4.625% Senior Notes due 2031 | $392.3 |
| Other notes payable | $90.7 |
| Finance lease obligations | $324.0 |
| Total Long-term Debt | $2,577.5 million |
Leverage and Interest Coverage Ratios: As of September 30, 2024, the maximum leverage ratio requirement was 4.75x with a minimum interest coverage ratio of 3.0x. The company remained in compliance with these covenants .
Is Encompass Health Corporation (EHC) Overvalued or Undervalued?
Valuation Analysis
To assess whether the company is overvalued or undervalued, we will analyze key financial ratios, stock price trends, dividends, and analyst consensus.
Price-to-Earnings (P/E) Ratio
The current P/E ratio stands at 22.4, based on a trailing twelve-month earnings per share (EPS) of $3.33.
Price-to-Book (P/B) Ratio
The P/B ratio is calculated at 3.8, with a book value per share of $5.22.
Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
The EV/EBITDA ratio is approximately 12.1, calculated using an enterprise value of $5.6 billion and EBITDA of $464 million.
Stock Price Trends
Over the past 12 months, the stock price has fluctuated between a low of $55.00 and a high of $80.00. As of the most recent trading session, the stock is priced at $75.50, reflecting a 5.3% increase year-to-date.
Dividend Yield and Payout Ratios
The current dividend yield is 0.9%, with an annual dividend of $0.17 per share. The payout ratio is 5.1%, indicating a sustainable dividend policy.
Analyst Consensus
Analysts currently rate the stock as a Hold, with a consensus target price of $78.00. The breakdown of ratings is as follows:
- Buy: 5 analysts
- Hold: 12 analysts
- Sell: 3 analysts
| Metric | Value |
|---|---|
| P/E Ratio | 22.4 |
| P/B Ratio | 3.8 |
| EV/EBITDA Ratio | 12.1 |
| 12-Month Low | $55.00 |
| 12-Month High | $80.00 |
| Current Stock Price | $75.50 |
| Dividend Yield | 0.9% |
| Annual Dividend | $0.17 |
| Payout Ratio | 5.1% |
| Analyst Consensus | Hold |
| Consensus Target Price | $78.00 |
Key Risks Facing Encompass Health Corporation (EHC)
Key Risks Facing Encompass Health Corporation
Encompass Health Corporation faces various internal and external risks that impact its financial health. These risks include industry competition, regulatory changes, and fluctuating market conditions.
Industry Competition
The healthcare industry is highly competitive, with numerous players vying for market share. As of September 30, 2024, Encompass Health reported a net operating revenue of $1,351.0 million, representing an increase of 11.9% from $1,206.9 million for the same period in 2023. This growth reflects the company’s ability to attract patients, but ongoing competition could pressure margins and market share.
Regulatory Changes
Changes in healthcare regulations can significantly impact operations and profitability. For instance, the repeal of the Certificate of Need (CON) requirement in South Carolina affected the company's cost structure and investment strategies. The company incurred a $10.4 million impairment charge related to the closure of a joint venture hospital due to regulatory shifts.
Market Conditions
Fluctuating economic conditions can affect patient volumes and revenue. As of September 30, 2024, Encompass Health’s average occupancy rate was 75.4%, up from 72.8% in the previous year, indicating a positive trend in patient intake despite economic uncertainties. However, a downturn in the economy could lead to reduced patient admissions and lower revenues.
Operational Risks
Operational risks include staffing challenges and the management of operational costs. The company reported a significant increase in salaries and benefits, with total operating expenses reaching $1,141.9 million for the three months ended September 30, 2024, compared to $1,027.5 million in the same period of 2023. This increase in operational costs, driven by employee compensation and benefits, could impact profitability if not managed effectively.
Financial Risks
Financial risks, including debt management, are critical for the company. As of September 30, 2024, Encompass Health had long-term debt of $2,344.5 million, down from $2,687.8 million at the end of 2023. The company’s interest expense for the nine months ended September 30, 2024, was $104.4 million, reflecting ongoing obligations that could pressure cash flow.
Mitigation Strategies
To address these risks, Encompass Health has implemented several strategies. The company continues to invest in technology and operational efficiencies to reduce costs and improve patient care. For instance, the planned capital expenditures for 2024 are estimated between $595 million and $625 million, which includes both discretionary and non-discretionary expenditures.
| Risk Factor | Description | Current Impact | Mitigation Strategy |
|---|---|---|---|
| Industry Competition | High competition in healthcare services | Net operating revenue of $1,351.0 million | Enhancing patient care and services |
| Regulatory Changes | Impact of healthcare regulations on operations | Impairment charge of $10.4 million | Monitoring regulatory environment closely |
| Market Conditions | Economic conditions affecting patient volume | Occupancy rate at 75.4% | Diversifying service offerings |
| Operational Risks | Challenges in staffing and operational costs | Operating expenses of $1,141.9 million | Investing in workforce management |
| Financial Risks | Debt management and interest obligations | Long-term debt of $2,344.5 million | Refinancing and debt reduction strategies |
Future Growth Prospects for Encompass Health Corporation (EHC)
Future Growth Prospects for Encompass Health Corporation
Analysis of Key Growth Drivers
Encompass Health Corporation is poised for significant growth in the coming years, driven by several factors:
- Market Expansion: The company operates 165 inpatient rehabilitation hospitals across 38 states and Puerto Rico. Recent openings include a 50-bed hospital in Kissimmee, Florida, and a 40-bed facility in Atlanta, Georgia.
- Joint Ventures: Partnerships with local health systems have led to new hospital openings, including facilities in Louisville, Kentucky, and Johnston, Rhode Island.
- Capacity Growth: The addition of 125 new beds across existing hospitals supports the growing demand for rehabilitation services.
Future Revenue Growth Projections and Earnings Estimates
Revenue growth projections for 2024 indicate a positive trend, with net operating revenues expected to reach approximately $5.4 billion, reflecting an increase of 11.6% year-over-year. Earnings estimates are equally optimistic, with diluted earnings per share projected at $3.31 for 2024, up from $2.65 in 2023.
Strategic Initiatives or Partnerships Driving Future Growth
Strategic initiatives include:
- Technology Investments: Continued investment in technology to enhance patient care and operational efficiency is expected to drive growth.
- Geographic Expansion: The company plans to open new facilities in key markets, such as a 61-bed hospital in Houston, Texas, expected in Q4 2024.
- Partnerships with Health Systems: Collaborations with local health systems, such as Baptist Health and Piedmont, are critical for expanding service offerings.
Competitive Advantages Positioning the Company for Growth
Encompass Health's competitive advantages include:
- Market Leader: As the largest operator of inpatient rehabilitation hospitals in the U.S., the company benefits from economies of scale and a strong brand reputation.
- Diverse Payor Mix: The company derives 65.4% of its revenues from Medicare, providing a stable revenue base.
- Operational Efficiency: A focus on reducing operating expenses as a percentage of net revenues has improved profitability.
Table: Financial Performance Metrics
| Metric | 2024 (Projected) | 2023 (Actual) | Change (%) |
|---|---|---|---|
| Net Operating Revenues | $5.4 billion | $4.8 billion | 11.6% |
| Diluted Earnings per Share | $3.31 | $2.65 | 25.0% |
| Operating Expenses as % of Revenues | 84.1% | 85.0% | -1.1% |
| Occupancy Rate | 75.4% | 72.8% | 3.6% |
| Number of Licensed Beds | 11,041 | 10,677 | 3.4% |
Conclusion
Encompass Health Corporation's strategic focus on market expansion, joint ventures, and operational efficiency positions it well for future growth, supported by a strong revenue base and a commitment to enhancing patient care.
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Article updated on 8 Nov 2024
Resources:
- Encompass Health Corporation (EHC) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of Encompass Health Corporation (EHC)' financial performance, including balance sheets, income statements, and cash flow statements.
- SEC Filings – View Encompass Health Corporation (EHC)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.