Select Medical Rises 50.2% YTD: Take Profits or Bet on More Gains?

Core Viewpoint - Select Medical Holdings Corporation (SEM) has experienced a significant share price increase of 50.2% year-to-date, outperforming the industry and the S&P 500 Index, but faces challenges that may impact future performance [1]. Group 1: Stock Performance - SEM's stock is currently trading at $35.30, nearing the upper end of its 52-week range of $21.28 to $40.50 [1]. - The stock is trading below its 50-day moving average, indicating potential downward momentum [2]. Group 2: Financial Performance and Costs - Rising costs and expenses have negatively impacted SEM's profitability, with costs increasing by 11.5% in 2021, 5.8% in 2022, and 2.5% in 2023, and a further 5.6% rise in the first half of 2024 [3]. - A projected year-over-year rise of over 4% in overall costs for the current year is expected to pressure profit margins [3]. Group 3: Capital Efficiency and Leverage - SEM's return on invested capital is 6.1%, which is below the industry average of 10.6%, indicating less efficient capital utilization [4]. - The company's net debt-to-capital ratio is 67%, significantly higher than the industry average of 21.7%, with long-term debt totaling $3.6 billion and cash and cash equivalents at $111.2 million as of June 30, 2024 [5]. Group 4: Valuation and Earnings Estimates - SEM is trading at a forward 12-month price-to-earnings multiple of 16.21X, higher than its five-year median of 12.99X and close to the industry's average of 16.59X, suggesting limited growth potential [6]. - The Zacks Consensus Estimate for SEM's current-quarter adjusted earnings is 41 cents per share, reflecting a 10.9% year-over-year decline, with a further 13.9% decline projected for the next quarter [6]. Group 5: Growth Opportunities - Despite rising costs, increasing admissions and patient days are expected to drive revenue growth, particularly in the Rehabilitation Hospital unit [7]. - SEM plans to add 449 additional beds by 2026 to meet rising demand and boost volumes [7]. Group 6: Market Sentiment - The negative sentiment surrounding SEM is evident, with earnings per share estimates declining, leading to caution among investors [8].