A month has gone by since the last earnings report for Encompass Health (EHC). Shares have added about 5.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Encompass Health due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Encompass Health Q4 Earnings Beat on Higher Discharges
Encompass Health reported fourth-quarter 2023 adjusted earnings per share (EPS) of 95 cents, which outpaced the Zacks Consensus Estimate by 14.5%. The bottom line rose 8% year over year.
Net operating revenues amounted to $1.2 billion, which advanced 9.6% year over year in the quarter under review. The top line beat the consensus mark by a whisker.
The quarterly results benefited on the back of an increase in discharges and higher net patient revenue per discharge. However, the upside was partly offset by elevated operating expenses.
Q4 Operations
EHC’s net patient revenue per discharge inched up 0.9% year over year in the fourth quarter, lower than our growth estimate of 1.4%. Total discharges of 59.2 million improved 8.3% year over year and surpassed the Zacks Consensus Estimate of 58.2 million and our estimate of 58.5 million.
Total operating expenses increased 10.4% year over year to $1.06 billion, lower than our estimate of $1.07 billion. The metric witnessed a year-over-year rise due to elevated salaries and benefits and, other operating expenses.
Net and comprehensive income of $119.1 million grew 1.4% year over year in the quarter under review.
Adjusted EBITDA advanced 9.6% year over year to $255 million, which beat our estimate of $234.5 million. Strong revenue growth provided an impetus to the performance of the metric.
Encompass Health added five beds to its existing hospitals in the quarter under review.
Financial Update (as of Dec 31, 2023)
Encompass Health exited the fourth quarter with cash and cash equivalents of $69.1 million, which increased more than three-fold from the 2022-end figure.
Total assets of $6.1 billion increased 8.3% from the level at 2022 end.
Long-term debt, net of the current portion, amounted to $2.7 billion, down 2% from the figure as of Dec 31, 2022. The current portion of long-term debt totaled $24.8 million.
Total shareholders’ equity of $2.3 billion rose 23.5% from the 2022-end figure.
EHC generated net cash from operations of $201 million in the fourth quarter, which climbed 16.7% year over year. Adjusted free cash flow of $93.5 million more than doubled year over year.
Capital Deployment Update
Encompass Health did not buy back shares in the fourth quarter. The company had a leftover capacity of around $198 million under its buyback authorization as of Dec 31, 2023.
Management paid out a quarterly cash dividend of 15 cents per share.
2024 Outlook Unveiled
Net operating revenues are projected between $5.2 billion and $5.3 billion, the mid-point of which indicates an improvement of 9.3% from the 2022 reported figure of $4.8 billion.
Adjusted EBITDA is anticipated to be $1.015-$1.055 billion in 2024, the midpoint of which suggests 6.6% growth from the 2022 figure of $971.1 million.
Adjusted EPS from continuing operations is expected to stay within $3.77-$4.06, the mid-point of which implies a 7.6% rise from the 2022 figure of $3.64.
Adjusted free cash flow is estimated to lie between $465 million and $565 million for 2024. Maintenance capex is anticipated within $185-$195 million.
Growth Targets Reaffirmed
Over the 2023-2027 period, management aims to inaugurate six to ten de novos each year as well as make bed additions in the range of 80-120 each year. It also targets to bring about a CAGR of 6-8% in discharges in the same time frame.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
VGM Scores
Currently, Encompass Health has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Encompass Health has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Encompass Health belongs to the Zacks Medical - Outpatient and Home Healthcare industry. Another stock from the same industry, Quest Diagnostics (DGX), has gained 0.7% over the past month. More than a month has passed since the company reported results for the quarter ended December 2023.
Quest Diagnostics reported revenues of $2.29 billion in the last reported quarter, representing a year-over-year change of -1.9%. EPS of $2.15 for the same period compares with $1.98 a year ago.
For the current quarter, Quest Diagnostics is expected to post earnings of $1.89 per share, indicating a change of -7.4% from the year-ago quarter. The Zacks Consensus Estimate has changed -4.2% over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #4 (Sell) for Quest Diagnostics. Also, the stock has a VGM Score of B.
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