Group 1: Market Overview - Major U.S. equity indices delivered positive returns in Q4 2025, while the Russell Midcap® Index lagged with nominal positive gains [1] - Strong corporate earnings revisions and lower short-term interest rates supported U.S. market returns [1] - High sector return dispersion was observed in the Russell Midcap Index, with healthcare, materials, and IT leading, while communication services, real estate, and utilities lagged [1] Group 2: Midcap Equities Outlook - The fund expects Midcap equities to trade higher in 2026, supported by broader market involvement, aligning with consensus [1] - U.S. market index earnings are projected to grow significantly in 2026 despite higher price-to-earnings ratios compared to historical averages [1] Group 3: Encompass Health Corporation (NYSE:EHC) - Encompass Health Corporation is a leading inpatient rehabilitation services provider with a market capitalization of $9.645 billion [2] - The stock closed at $95.86 per share on March 20, 2026, with a one-month return of -9.69% and a 52-week loss of 4.10% [2] - Encompass shares lagged due to capital rotation into more aggressive healthcare industries and conservative management commentary for 2026 [3] - The company is uniquely expanding inpatient rehabilitation facility beds amid healthy demand, positioning it to compound value over time [3]

Core Insights - Encompass Health Corporation (EHC) is a leading provider of inpatient rehabilitation services in the U.S., focusing on high-quality rehabilitation care for patients recovering from serious injuries, illnesses, or surgeries [2][3] Company Overview - EHC operates 173 inpatient rehabilitation hospitals across 39 U.S. states and Puerto Rico, with a market capitalization of approximately $10 billion [3] - The company's shares have gained 2.7% over the past year, underperforming the industry's average increase of 5.9% during the same period [3] Valuation Metrics - EHC's forward P/E ratio is 16.71x, lower than the industry average of 17.51x, indicating a relatively attractive valuation [4] - The company holds a Zacks Rank 3 (Hold) and a Value Score of B [4] Earnings Estimates - The Zacks Consensus Estimate for EHC's 2026 earnings is $5.90 per share, suggesting an 8.3% year-over-year increase [5] - The consensus estimate for 2026 revenues is $6.4 billion, indicating 8.3% year-over-year growth, with expected revenues of $6.365–$6.465 billion, up from $5.9 billion in 2025 [5] Growth Drivers - EHC is focused on expanding its Inpatient Rehabilitation segment, having opened eight de novo hospitals with 395 beds in 2023 and plans for further expansions [7][10] - The company reported a 10.5% year-over-year increase in revenues in 2025, driven by an expanding patient base [11] Financial Performance - EHC generated $818 million in adjusted free cash flow in 2025, supporting expansion, buybacks, and dividends [9] - Net operating cash flow increased by 17.9% in 2024 and 17.2% in 2025, reaching $1.2 billion [11] - The company returned value to shareholders through $71.1 million in dividends and $158 million in share repurchases [12] Return on Investment - EHC boasts a trailing 12-month return on invested capital (ROIC) of 10%, surpassing the industry average of 6.3%, indicating efficient use of investments [13]

Group 1 - Madison Small Cap Fund underperformed its benchmark, the Russell 2000 Index, with a return of -0.4% compared to the benchmark's 2.2% return in Q4 2025 [1] - The healthcare sector was identified as the weakest sector impacting the fund's performance, particularly due to the poor performance of its largest investment, Encompass Health Corporation [3] - Encompass Health Corporation (NYSE:EHC) has a market capitalization of $10.099 billion, with a one-month return of -8.87% and a 52-week gain of 2.68% [2] Group 2 - Encompass Health Corporation is not among the 40 most popular stocks among hedge funds, with 50 hedge fund portfolios holding the stock at the end of Q4 2025, unchanged from the previous quarter [4] - The company is viewed as a defensive business and stock in a market favoring offensive investments, indicating a potential mismatch with current market trends [3] - There is a belief that certain AI stocks may offer greater upside potential and less downside risk compared to Encompass Health Corporation [4]

Core Insights - Encompass Health Corporation is a leading provider of inpatient rehabilitation services in the U.S., recognized for its clinical quality and capital management, with a focus on sustainable double-digit EBITDA growth driven by demographic trends and regulatory barriers [1] Financial Performance - In Q4 2025, Encompass Health reported an adjusted EPS of $1.46, reflecting a 24.8% increase year-over-year and exceeding the Zacks Consensus Estimate by 13.2% [3] - The company's net operating revenues reached $1.5 billion, representing a 9.9% year-over-year growth, attributed to higher net revenue per discharge and an increase in discharges [3] Financial Metrics - Encompass Health has a P/E ratio of 19.29, indicating that investors are willing to pay $19.29 for every dollar of earnings [4] - The price-to-sales ratio stands at 1.85, and the enterprise value to sales ratio is 1.88, reflecting the market's valuation of the company [4] - The company maintains a low debt-to-equity ratio of 0.08, showcasing a conservative leverage approach that enhances financial resilience [4] Operational Strength - The company owns 79% of its real estate, which supports its operational leverage and efficient hospital development [5] - Encompass Health's current ratio is 1.08, indicating its capability to meet short-term liabilities [5] - The company is recognized as a strong growth stock, with Zacks Style Scores assisting investors in identifying stocks with high short-term market outperformance potential [5]

Financial Data and Key Metrics Changes - Revenue for Q2 increased by 12% to $1.46 billion, while adjusted EBITDA rose by 17.2% to $318.6 million [13][7] - Total discharges for Q2 increased by 7.2%, with same-store discharges growing by 4.7% [7][13] - Net revenue per discharge increased by 4.2%, benefiting from a decrease in bad debt expense to 2% [13][14] - Adjusted free cash flow increased by 30.5% to approximately $186 million, bringing year-to-date adjusted free cash flow to approximately $408 million, a 31.7% increase from 2024 [15][16] Business Line Data and Key Metrics Changes - Neurological conditions and stroke discharges grew by 126.7% in Q2 [8] - The discharge community rate was 84.8%, with discharge to acute and SNF rates at 8.5% and 5.8% respectively, outperforming industry averages [8][11] - The company opened a new 60-bed hospital in Fort Myers, Florida, and added 26 beds to an existing hospital in Q2 [9] Market Data and Key Metrics Changes - The demand for inpatient rehabilitation services is significantly underserved, particularly as the U.S. population ages, with the Medicare beneficiary population projected to grow substantially [10] - The average age of Medicare beneficiaries is 77 years, with the population aged 65 and older growing at a CAGR of approximately 3% [10] Company Strategy and Development Direction - The company plans to open five additional hospitals and add 30 to 50 beds to existing hospitals by the end of the year [9] - The company is increasing its 2025 guidance for net operating revenue to between $5.88 billion and $5.98 billion, and adjusted EBITDA to between $1.22 billion and $1.25 billion [18] - The company continues to focus on treating complex medical conditions and developing best-in-class clinical protocols [11] Management's Comments on Operating Environment and Future Outlook - Management noted that the demand for inpatient rehabilitation services remains considerably underserved, with a focus on treating patients with complex medical conditions [10] - The company is optimistic about future growth, citing favorable demographic trends and an increase in Medicare reimbursement rates [12][10] Other Important Information - The company repurchased approximately 232,000 shares for $24.7 million and announced an increase in its quarterly dividend to $0.19 per share [17] - The company has a favorable leverage and liquidity position, with net leverage at two times and approximately $100 million in unrestricted cash [16] Q&A Session Summary Question: What are the occupancy rates and comfort levels for single bedroom facilities? - Management indicated that occupancy in Q2 was 76.6%, up 210 basis points year-over-year, and that stabilization above 80% would prompt consideration for future bed expansions [22][24] Question: What is the company's stance on quality ratings and initiatives? - Management stated that any changes in quality initiatives did not make it into the final rule and expressed willingness to support quality measurements that are agreed upon by the industry [27][28] Question: How does the company share quality results with stakeholders? - Management shares quality metrics such as discharge community rates and patient satisfaction scores with joint ventures and referring physicians [32][34] Question: What is the story behind the increase in managed care pricing assumptions? - The increase is attributed to growth in the VA Community Care Network, which now comprises almost 18% of the managed care business and pays at Medicare CMG rates [38] Question: What are the expectations for EBITDA in the second half of the year? - Management expects to incur most preopening and ramp-up costs in the second half, with guidance reflecting potential increases in bad debt and other costs [42] Question: How is the company addressing benefits expense growth? - Management noted that benefits expense per FTE increased by 18%, driven by high dollar medical claims, and indicated that strategies are in place to manage these costs [100] Question: What is the outlook for outpatient visits and pricing? - Outpatient visits increased by 8% quarter-over-quarter, attributed to a good book of business in remaining facilities, despite a reduction in the overall footprint [124]

Core Insights - Encompass Health reported strong financial results for Q2 2025, with GAAP revenue of $1.46 billion, exceeding consensus by $30.47 million, and non-GAAP EPS of $1.40, surpassing analyst expectations [1][2] - The company experienced double-digit growth in both revenue and profits compared to Q2 2024, prompting management to raise full-year guidance across key metrics [1][2] Financial Performance - Q2 2025 GAAP revenue was $1.46 billion, a 12.0% increase from $1.30 billion in Q2 2024 [2] - Non-GAAP EPS reached $1.40, up 26.1% from $1.11 in Q2 2024 [2] - Adjusted EBITDA grew 17.2% to $319 million from $272 million in the previous year [2] - Adjusted free cash flow increased by 30.5% compared to Q2 2024 [9] Operational Highlights - Total discharges rose to 65,237, a 7.2% increase year-over-year, with same-store discharges growing by 4.7% [5] - Revenue per discharge was $21,670, reflecting a 4.2% year-over-year increase [5] - The payer mix improved, with higher-reimbursement government programs increasing their share by 1.5 percentage points [6] Strategic Focus - The company operates 169 hospitals across 38 states and Puerto Rico, focusing on inpatient rehabilitation services [3] - Recent strategies include expansion through new hospital openings and adding beds to existing facilities [4] - Management emphasizes quality patient outcomes, regulatory compliance, and strategic partnerships [4] Future Outlook - Full-year net operating revenue guidance is now projected between $5.88 billion and $5.98 billion, with adjusted EBITDA guidance increased to $1.22 billion–$1.25 billion [13] - Management plans to continue growth through new hospital openings and bed expansions, targeting 6 to 10 new hospitals and 80 to 120 beds added annually [14]

Financial Data and Key Metrics Changes - Revenue for Q1 2025 increased by 10.6% to $1.46 billion, while adjusted EBITDA rose by 14.9% to $313.6 million [16] - Total discharges grew by 6.3%, with same-store discharges increasing by 4.4% [8][16] - Net revenue per discharge increased by 3.9%, driven by a favorable payer mix [16][20] Business Line Data and Key Metrics Changes - The company reported a discharge community rate of 84%, with a discharge to acute rate of 8.9% and a discharge to skilled nursing facility (SNF) rate of 6.4% [9] - Annualized RN turnover decreased to 20.1% from 20.4%, and therapist turnover fell to 6.3% from 7.7% [10] Market Data and Key Metrics Changes - The demand for inpatient rehabilitation services remains strong, with plans to open six de novo hospitals and add 300 beds in 2025 [11][12] - The company anticipates adding approximately 120 beds to existing hospitals in both 2026 and 2027 due to strong volumes and occupancy levels [12] Company Strategy and Development Direction - The company is increasing its 2025 guidance based on strong Q1 results, with net operating revenue expected to be between $5.85 billion and $5.925 billion [20] - The company continues to invest in capacity additions to meet the growing demand for inpatient rehabilitation services, particularly as the U.S. population ages [12][13] Management's Comments on Operating Environment and Future Outlook - Management noted that the demand for services is not expected to fluctuate with economic conditions, as patients are nondiscretionary [95] - The company is closely monitoring the payer mix and does not anticipate the recent trends to become the new normal [25][121] Other Important Information - The company opened a new 40-bed joint venture hospital in Athens, Georgia, and plans to open additional facilities throughout the year [11] - The company has a strong pipeline of de novo projects, with 10 hospitals and 500 beds expected to open beyond 2025 [12] Q&A Session Summary Question: Inquiry about the increase in Medicare fee-for-service discharges - Management confirmed that the increase was not due to strategic actions but rather a surprising shift in payer mix, with Medicare fee-for-service growing faster than Medicare Advantage [24][25] Question: Discussion on employee metrics and hiring plans - Management stated that they remain committed to maintaining an employee per occupied bed (EPOB) ratio of 3.4 and are actively hiring to meet demand [30][32] Question: Concerns regarding supply costs and construction expenses - Management indicated that they do not foresee significant near-term risks related to construction costs or supply chain issues [40][41] Question: Clarification on Medicaid supplemental payments - Management noted that Medicaid supplemental payments are not a significant concern for the company compared to acute care hospitals [45] Question: Insights on labor efficiency and sustainability - Management expressed optimism about maintaining low contract labor levels and improving labor efficiency, although they cautioned that one quarter's performance does not establish a trend [51][52] Question: Discussion on capacity expansion and growth strategy - Management confirmed that they are accelerating their growth strategy through bed expansions and are focused on maintaining high-quality patient outcomes [62][64] Question: Inquiry about the impact of economic conditions on demand - Management reassured that demand for services remains stable regardless of economic fluctuations, as patients require care regardless of economic status [95]