On Tuesday, BofA Securities updated its coverage on Select Medical Holdings (NYSE:SEM) stock, issuing a Buy rating and setting a price target of $42.00.
The firm's analysis highlighted the market's undervaluation of Select Medical's remaining business following the anticipated spin-off of its Concentra unit later this year.
The valuation of Select Medical's 82% stake in Concentra is a key factor in the analyst's positive outlook, with the price objective for Concentra set at $30.50.
This translates to a $12 per share valuation for Select Medical's remaining operations, which include its fast-growing Inpatient Rehabilitation Facilities (IRFs), Critical Illness Recovery Hospitals (CIRHs) in ramp-up mode, and Outpatient Rehabilitation for diversification.
The price target of $42 is based on a 10.2x multiple of the company's projected 2025 EBITDA, minus non-controlling interests. This multiple is at the higher end of Select Medical's historical range. The bullish stance is supported by the company's solid underlying growth and the expected continued margin improvement.
The analyst's report suggests that the current implied multiple of 6x EBITDA for Select Medical's RemainCo does not fully reflect its mid-single-digit growth potential.
The Buy rating reflects confidence in Select Medical's organic growth, driven by new openings and bed additions across its various healthcare facilities.
Select Medical's strategic moves, including the spin-off of Concentra and the ongoing development of its core healthcare services, are central to the firm's optimistic evaluation of the company's stock.
InvestingPro Insights
InvestingPro data offers a deeper dive into Select Medical Holdings' financial health and market performance. With a market capitalization of $4.36 billion, the company presents a P/E ratio of 16.02, which aligns with the BofA Securities' view of the market undervaluing the company. The adjusted P/E ratio slightly increased to 16.29 over the last twelve months as of Q2 2024. This valuation reflects a balance between the company's earnings and its stock price, suggesting a potential investment opportunity.
The growth metrics are also promising, with revenue growing by 5.92% over the last twelve months and a gross profit margin of 20.1%, indicating efficiency in the company's operations. The PEG ratio, which stands at 0.54, suggests that Select Medical's stock might be undervalued based on its earnings growth, giving credence to the analyst's optimistic outlook.
Two InvestingPro Tips highlight the potential for Select Medical's profitability and a strong return on investment. Analysts predict the company will be profitable this year, and it has been profitable over the last twelve months. Moreover, the stock has experienced a significant price uptick of 26.13% over the last six months, bolstering the case for its robust performance. For those interested in a comprehensive analysis, InvestingPro offers additional tips on their platform.
InvestingPro's fair value estimate stands at $27.52, which is lower than the analyst target but still suggests upside potential from the previous close price of $33.51. It's worth noting that the analyst target of $42.00 by BofA Securities exceeds both the current market price and InvestingPro's fair value estimate, indicating a more bullish perspective.
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