Encompass Health (EHC)

Health care services provider Encompass Health (NYSE:EHC) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 10.6% year on year to $1.46 billion. The company’s full-year revenue guidance of $5.89 billion at the midpoint came in 0.6% above analysts’ estimates. Its non-GAAP profit of $1.37 per share was 14.9% above analysts’ consensus estimates.

Company Overview

With a network of 161 specialized facilities across 37 states and Puerto Rico, Encompass Health (NYSE:EHC) operates inpatient rehabilitation hospitals that help patients recover from strokes, hip fractures, and other debilitating conditions.

The outpatient and specialty care industry delivers targeted medical services in non-hospital settings that are often cost-effective compared to inpatient alternatives. This means that they are more desired as rising healthcare costs and ways to combat them become more and more top-of-mind. Outpatient and specialty care providers boast revenue streams that are stable due to the recurring nature of treatment for chronic conditions and long-term patient relationships. However, their reliance on government reimbursement programs like Medicare means stroke-of-the-pen risk. Additionally, scaling a network of facilities can be capital-intensive with uneven return profiles amid competition from integrated healthcare systems. Looking ahead, the industry is positioned to grow as demand for outpatient services expands, driven by aging populations, a rising prevalence of chronic diseases, and a shift toward value-based care models. Tailwinds include advancements in medical technology that support more complex procedures in outpatient settings and the increasing focus on preventive care, which can be aided by data and AI. However, headwinds such as reimbursement rate cuts, labor shortages, and the financial strain of digitization may temper growth.

Encompass Health's main competitors include Select Medical Holdings (NYSE:SEM), Kindred Healthcare (private), Vibra Healthcare (private), and rehabilitation units operated within major hospital systems like HCA Healthcare (NYSE:HCA) and Universal Health Services (NYSE:UHS).

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $5.51 billion in revenue over the past 12 months, Encompass Health has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Thankfully, Encompass Health’s 9.2% annualized revenue growth over the last five years was decent. Its growth was slightly above the average healthcare company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Encompass Health’s annualized revenue growth of 11.3% over the last two years is above its five-year trend, suggesting some bright spots.

We can dig further into the company’s revenue dynamics by analyzing its same-store sales, which show how much revenue its established locations generate. Over the last two years, Encompass Health’s same-store sales averaged 5.5% year-on-year growth. Because this number is lower than its revenue growth, we can see the opening of new locations is boosting the company’s top-line performance.

This quarter, Encompass Health reported year-on-year revenue growth of 10.6%, and its $1.46 billion of revenue exceeded Wall Street’s estimates by 1.6%.

Looking ahead, sell-side analysts expect revenue to grow 8.6% over the next 12 months, a slight deceleration versus the last two years. Still, this projection is admirable and suggests the market is forecasting success for its products and services.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Encompass Health has managed its cost base well over the last five years. It demonstrated solid profitability for a healthcare business, producing an average operating margin of 17.2%.

Looking at the trend in its profitability, Encompass Health’s operating margin of 16.9% for the trailing 12 months may be around the same as five years ago, but it has decreased by 4 percentage points over the last two years.

This quarter, Encompass Health generated an operating profit margin of 18.3%, up 1.4 percentage points year on year. This increase was a welcome development and shows it was more efficient.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Encompass Health’s EPS grew at an unimpressive 4.6% compounded annual growth rate over the last five years, lower than its 9.2% annualized revenue growth. However, its operating margin didn’t change during this time, telling us that non-fundamental factors such as interest and taxes affected its ultimate earnings.

Diving into the nuances of Encompass Health’s earnings can give us a better understanding of its performance. A five-year view shows Encompass Health has diluted its shareholders, growing its share count by 2.5%. This has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Encompass Health reported EPS at $1.37, up from $1.12 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Encompass Health’s full-year EPS of $4.68 to grow 4.9%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Encompass Health has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 11.8% over the last five years, better than the broader healthcare sector.

Taking a step back, we can see that Encompass Health’s margin dropped by 2.2 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity.

Encompass Health’s free cash flow clocked in at $222.4 million in Q1, equivalent to a 15.3% margin. This result was good as its margin was 2.5 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Encompass Health hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 16.3%, impressive for a healthcare business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, Encompass Health’s ROIC averaged 3.2 percentage point increases over the last few years. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

Encompass Health reported $95.8 million of cash and $2.7 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.14 billion of EBITDA over the last 12 months, we view Encompass Health’s 2.3× net-debt-to-EBITDA ratio as safe. We also see its $102.2 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Encompass Health beat analysts’ full-year EPS guidance expectations this quarter. We were also glad both its revenue and EPS outperformed Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 2.5% to $103.95 immediately after reporting.

Updated: July 10, 2025 at 11:58 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Encompass Health.

Encompass Health isn’t a bad business, but we have other favorites. First off, its revenue growth was decent over the last five years and is expected to accelerate over the next 12 months. On top of that, Encompass Health’s market-beating ROIC suggests it has been a well-managed company historically, and its sturdy operating margins show it has disciplined cost controls.

Encompass Health’s P/E ratio based on the next 12 months is 23.9x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $131.58 on the company (compared to the current share price of $117).