Shares of Select Medical Holdings Corporation SEM have plunged 48.2% in the past six months, underperforming the industry’s decline of 1.9%. Peers like Centene Corporation CNC and The Cigna Group CI have lost 9.4% and 15.7%, respectively, over the same time frame.
In contrast, the S&P 500 index has returned 6.4% over the same period, highlighting a divergence in performance. The stock is down 14.9% at this point from its 52-week high of $22.08. The stock is currently trading below its 50-day moving average, signaling potential downward momentum.
SEM 6-Month Price Performance Comparison
Image Source: Zacks Investment Research
Given this performance so far, can investors still consider holding on to Select Medical stock, or should steer clear of this stock? Let’s delve deeper.
What’s Weighing on SEM Stock?
Select Medical's profitability has been adversely affected by escalating costs and expenses, which increased 11.5%, 5.8% and 2.5% in 2021, 2022 and 2023, respectively. In the first nine months of 2024, costs rose an additional 5.6%, driven by higher service expenses. For the full year, overall costs are projected to increase more than 5% year over year, which is expected to exert pressure on profit margins.
The company pursues growth through acquisitions to enhance volumes, but its return on invested capital is 6.2%, falling short of the industry average of 10.4%, suggesting less effective capital utilization.
Additionally, Select Medical grapples with significant leverage that could constrain its ability to execute an inorganic growth strategy. Its net debt-to-capital ratio is a high 55.2% compared to the industry average of 20.6%. As of Sept. 30, 2024, the company reported $3.1 billion in long-term debt (excluding current portions) and cash and cash equivalents of only $191.5 million.
SEM completed the spin-off of Concentra in November 2024. This strategic move streamlines SEM’s operations and enables the company to focus on its core business areas, such as critical illness recovery hospitals, rehabilitation hospitals and outpatient rehabilitation clinics. While the spin-off and other strategic initiatives may position Select Medical for future growth, rising expenses and significant leverage suggest caution.
SEM’s Valuation
The company is currently trading at 9.57X forward 12-month earnings, below its five-year median of 12.90X and the industry average of 14.34X. This indicates the stock may be undervalued, possibly signaling cautious investor sentiment or concerns about its short-term outlook.
Image Source: Zacks Investment Research
SEM’s peers like Centene and Cigna are valued at 8.88X and 9.62X forward 12-month earnings, respectively.
SEM’s Earnings Estimates Moving Down
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 15 cents per share, indicating a 58.3% year-over-year decline. The consensus mark for next quarter’s earnings suggests a further 46.8% fall.
Image Source: Zacks Investment Research
Conclusion
Rising costs and significant leverage are straining SEM’s financial health. Despite a low valuation and strategic moves like the Concentra spin-off, downward earnings revisions and underperformance compared to peers and the market signal continued struggles. Given these factors, SEM's risks outweigh its potential.
Given its Zacks Rank #5 (Strong Sell), the stock appears to be a risky investment at present, investors should get rid of.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Research Chief Names "Single Best Pick to Double"
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
This company targets millennial and Gen Z audiences, generating nearly $1 billion in revenue last quarter alone. A recent pullback makes now an ideal time to jump aboard. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.
Free: See Our Top Stock And 4 Runners UpCigna Group (CI) : Free Stock Analysis Report
Centene Corporation (CNC) : Free Stock Analysis Report
Select Medical Holdings Corporation (SEM) : Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
