On Tuesday, BofA Securities updated their outlook on Select Medical Holdings (NYSE:SEM), increasing the price target to $24 from the previous $22.61 while maintaining a Buy rating. The adjustment follows the completion of the distribution of Concentra stock by Select Medical (TASE:PMCN), which occurred on November 25.
The company's stock has shown remarkable strength, delivering a 68.7% return year-to-date, and according to InvestingPro analysis, the stock appears undervalued based on their proprietary Fair Value model.
The distribution of Concentra shares was a result of the recent initial public offering (IPO) of Concentra, in which Select Medical shareholders received 0.81 shares of Concentra for every share of Select Medical they owned. This event marked the end of Select Medical's 82% ownership in Concentra.
Following the distribution, BofA Securities revised Select Medical's revenue estimates downward by 27% and adjusted EBITDA estimates by 40%. The new price target of $24 reflects the changed ownership structure and applies a higher multiple of 9.5 times the estimated adjusted EBITDA for 2025, less non-controlling interests.
The previous multiple was 7.7 times. Currently, the company trades at an EV/EBITDA multiple of 9.12x and maintains a strong financial health score of 3.33 out of 5 on InvestingPro, which offers comprehensive valuation metrics and detailed Pro Research Reports for over 1,400 US stocks.
The analyst noted that the adjusted multiple is still at a discount compared to Select Medical's peers in certain segments, which trade between 11 to 17 times EV/EBITDA. However, the new multiple represents a premium over acute hospitals, acknowledging that Select Medical is not subject to the same risks such as the potential expiration of exchange subsidies or Medicaid cuts.
The firm's positive outlook on Select Medical is driven by anticipated mid-single-digit organic growth. This growth is expected to be fueled by the expansion of Inpatient Rehab Facilities (IRFs), including new developments and the addition of beds.
In other recent news, Select Medical Holdings Corporation reported a strong third quarter in 2024, with consolidated revenue and adjusted EBITDA both growing by 6% compared to the same period last year. The company successfully completed the initial public offering of Concentra, issuing over 23 million shares while retaining a majority stake. Plans are in place to distribute the remaining interest in Concentra to shareholders by the end of the year, depending on market conditions.
Select Medical's inpatient rehab division saw a 14% rise in revenue and a 12% increase in adjusted EBITDA, despite startup losses from new facilities. The critical illness recovery division also experienced growth, with a 3% increase in revenue and a 9% rise in adjusted EBITDA. Furthermore, the company has a new 48-bed rehab hospital under development in Jacksonville, Florida, and additional facilities planned in other states.
The company revised its 2024 revenue outlook to a range of $6.95 billion to $7.15 billion, with adjusted EBITDA projected between $865 million and $885 million. Despite some startup losses and a slight increase in day sales outstanding, Select Medical continues its growth trajectory with multiple development projects underway and improved operational efficiency expected in the coming year.
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