Encompass Health (EHC): This Rehab Hospital Giant Just Raised Its Own Bar Again

Encompass Health (NYSE:EHC) reported strong second quarter results on August 5, exceeding its own expectations and raising full-year guidance twice. Net operating revenue increased by 9.6% to $1.597 billion, while adjusted earnings per share climbed by 10.7% to $1.55. The growth in patient volume and wider guidance indicates a sustainable scaling story for the company.

During the quarter, Encompass Health discharged 68,895 patients, a 5.6% increase from the previous year. Same-store discharges also rose by 2.8%, even as the network continues to add capacity. Net patient revenue per discharge grew by 3.9% to $22,521, meaning the company is paid more for each patient while treating more of them.

The company opened three new hospitals with a total of 139 beds and added 54 beds to existing facilities in the first half of the year. Five more hospitals and over 100 additional beds are planned before year-end. Management raised full-year guidance, with expected revenue ranging from $6.41 billion to $6.49 billion, adjusted EBITDA between $1.365 billion and $1.395 billion, and adjusted earnings per share between $6.02 and $6.25, all higher than previous projections.

The board increased the common stock repurchase authorization to $1 billion on July 23, following the company's $145.8 million stock buyback this year, which reduced diluted shares outstanding to 100.0 million from 102.3 million a year earlier. However, adjusted free cash flow fell by 4.8% to $177.0 million, despite adjusted EBITDA growth, as maintenance capital spending increased to $66.2 million from $45.1 million a year earlier.

The balance sheet reflects this expansion, with long-term debt rising to $2.598 billion from $2.447 billion, after issuing $500 million in new bonds during the first half of the year. Interest expense also increased to $32.8 million from $30.4 million, and the quarter included a $3.2 million loss on early debt extinguishment.

The stock buyback, which boosted earnings per share, had nearly depleted its remaining allowance, with only $188 million left as of June 30. The increase in hedge fund ownership to 49 funds from 44 indicates growing confidence in the stock. Short interest at 3.74% of the float suggests little organized skepticism. Encompass Health's shares trade at a forward price-to-earnings ratio of 18.98, pricing in the growth achieved in the quarter.