On Monday, BofA Securities revised its stance on U.S. Physical Therapy (NYSE:USPH), downgrading the stock to Neutral from Buy and adjusting the price target to $90 from the previous $114. The decision comes amid concerns about increasing labor costs and a slower-than-anticipated development of new locations.
Additionally, the slowing economy is expected to affect customer demand and the mix of payors, which could further pressure the company's financial performance.
The downgrade reflects a cautious outlook on the company's near-term prospects, given the current economic climate and its potential impact on U.S. Physical Therapy's business operations. The firm noted that while the long-term growth prospects remain solid, the combination of rising labor expenses and a sluggish opening of new clinics, known as a denovo ramp, poses challenges.
In light of these factors, BofA Securities has recalculated the price objective based on a reduced multiple. The new target is set using a 12.5 times multiple on the projected 2025 adjusted enterprise value to EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs), which is a decrease from the prior multiple of 15.1 times.
The analyst's comments suggest that the economic downturn may continue to suppress the company's valuation multiple, especially given U.S. Physical Therapy's exposure to commercial payors. This exposure is seen as a potential risk in the event of a prolonged economic slowdown, which could lead to changes in consumer spending and insurance coverage patterns.
In other recent news, U.S. Physical Therapy, Inc. reported record-breaking clinic visits for Q2 2024, marking a significant milestone in the company's history. Despite challenges like rising labor costs and potential Medicare reimbursement rate reductions, the company achieved substantial growth and financial improvements.
The adjusted EBITDA for the quarter reached $22.1 million, while physical therapy revenues saw an 8.5% increase compared to the same period last year.
In addition to its noteworthy earnings, U.S. Physical Therapy also expanded its operations in Pennsylvania through a strategic acquisition. By acquiring a 70% stake in a local practice with eight clinic locations, the company expects to generate an estimated $5.5 million in annual revenues. This move not only broadens the company's reach in the Northeastern United States but also aligns with its ongoing growth strategy.
Analysts anticipate a full-year 2024 EBITDA between $80 million to $85 million. To counter potential Medicare reimbursement rate cuts and address labor shortages, U.S. Physical Therapy is actively negotiating higher rates with commercial payers and investing in recruitment and school partnerships.
InvestingPro Insights
Recent data from InvestingPro adds context to BofA Securities' downgrade of U.S. Physical Therapy (NYSE:USPH). The company's market cap stands at $1.22 billion, with a P/E ratio of 76.59, indicating a high earnings multiple as noted in one of the InvestingPro Tips. This valuation metric aligns with BofA's concerns about the company's near-term prospects and their decision to reduce the price target.
Despite the challenges highlighted in the article, InvestingPro data shows that USPH has maintained dividend payments for 14 consecutive years and has raised its dividend for 3 consecutive years. This consistency in dividend policy could be seen as a positive sign for income-focused investors, even in the face of economic headwinds.
The company's revenue growth of 8.04% over the last twelve months and 10.37% in the most recent quarter suggests that USPH is still experiencing growth, albeit potentially at a slower rate than previously anticipated. This growth, coupled with the InvestingPro Tip that net income is expected to grow this year, may provide some counterbalance to the concerns about labor costs and slower clinic openings mentioned in the article.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for USPH, which could provide further insights into the company's financial health and market position.
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