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Encompass Health Stock Rises 39.4% YTD: Should You Buy Now?

Encompass Health Corporation EHC shares have shot up 39.4% in the year-to-date period, outperforming the industry’s return of 17.9% and the S&P 500 Index’s rise of 18.4%. Growing patient volumes and impressive growth-related initiatives appear to have catalyzed this bullishness.

Currently priced at $93.05, the stock is just 1.4% below its 52-week high of $94.38. This proximity underscores investor confidence and market optimism about this healthcare company’s prospects. It has the ingredients for further price appreciation. Technical indicators for Encompass Health show that the stock is trading above its 50-day and 200-day moving averages, signaling strong upward momentum.

EHC YTD Share Price Performance

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Is this the right time to buy EHC shares for potential upside? Let’s take a look at the stock’s growth drivers.

EHC Growth Drivers

Growing occupancy at the healthcare facility provider, rising discharges and net patient revenue per discharge are major tailwinds. We expect the occupancy rate to rise from 72.1% in 2023 to 75.4% in 2024. Also, our model estimate predicts a 7% increase in total discharges this year.

To meet the increasing demand for its services, the company is expected to continue adding beds. For 2024, EHC expects to open six de novo hospitals with a total addition of 280 beds. It is also expected to add around 110 beds to existing hospitals in 2024. The Birmingham, AL-based company’s efforts to add beds will enable it to capture a bigger market share.

Estimate Revision Favoring EHC Stock

Reflecting the positive sentiment around Encompass Health, the Zacks Consensus Estimate for earnings per share has seen upward revisions. The consensus estimate for 2024 adjusted earnings for EHC is currently pegged at $4.17 per share, which indicates a 14.6% year-over-year surge. The consensus mark for 2025 suggests a further 10.7% jump.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

The company beat earnings estimates in each of the past four quarters, with an average surprise of 14.1%. The consensus estimate for 2024 and 2025 revenues suggests 10.6% and 8.6% year-over-year growth, respectively.

Key Concerns for EHC

There are a few factors that investors should keep an eye on.

Encompass Health's cash and cash equivalents of $154.4 million at the second quarter-end were much lower than the long-term debt, net of the current portion, of $2.7 billion. Its long-term debt-to-capitalization of 52.4% is higher than the industry average of 48.6%.

Rising occupancy levels will continue hiking operating expenses due to higher salaries and benefits, occupancy costs and supply costs. Total operating expenses rose 10.8% in 2022 and 9.4% in 2023. We expect the metric to further rise by more than 10% in 2024.

Final Verdict: Hold EHC Stock for Now

Encompass Health appears to have significant growth potential with rising demand for its services, facility expansionary moves and higher revenue per patient discharges. Current shareholders may consider holding on to their shares, as earnings estimate revisions are indicating more profits on the way. However, potential investors might want to keep an eye on its balance sheet and expense-controlling efforts and wait for a better entry point.

EHC stock currently carries a Zacks Rank #3 (Hold).

Key Picks

Investors can look at some better-ranked stocks in the broader Medical space, like Universal Health Services, Inc. UHS, Tenet Healthcare Corporation THC and Quest Diagnostics Incorporated DGX. While Universal Health and Tenet Healthcare currently sport a Zacks Rank #1 (Strong Buy) each, Quest Diagnostics 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 50.8% year-over-year growth. UHS witnessed three upward estimate revisions over the past month 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 $10.70 per share, which indicates 53.3% growth from a year ago. During the past month, THC witnessed two 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 Quest Diagnostics’ 2024 full-year earnings implies a 2.1% increase from the year-ago reported figure. DGX beat earnings estimates in each of the last four quarters, with an average surprise of 3.3%. The consensus mark for its current-year revenues is pegged at $9.6 billion, which indicates a 3.3% year-over-year increase.

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Quest Diagnostics Incorporated (DGX) : Free Stock Analysis Report

Universal Health Services, Inc. (UHS) : Free Stock Analysis Report

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Encompass Health Corporation (EHC) : Free Stock Analysis Report

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