Select Medical (NYSE:SEM) Misses Q4 Sales Targets, Stock Drops
Healthcare services company Select Medical (NYSE:SEM) fell short of the market’s revenue expectations in Q4 CY2024, with sales falling 20.9% year on year to $1.31 billion. The company’s full-year revenue guidance of $5.5 billion at the midpoint came in 9.1% below analysts’ estimates. Its GAAP loss of $0.13 per share was significantly below analysts’ consensus estimates.
Revenue: $1.31 billion vs analyst estimates of $1.44 billion (20.9% year-on-year decline, 8.9% miss)
EPS (GAAP): -$0.13 vs analyst estimates of $0.22 (significant miss)
Adjusted EBITDA: $116 million vs analyst estimates of $148.3 million (8.8% margin, 21.8% miss)
Management’s revenue guidance for the upcoming financial year 2025 is $5.5 billion at the midpoint, missing analyst estimates by 9.1% and implying -16.9% growth (vs -0.7% in FY2024)
EPS (GAAP) guidance for the upcoming financial year 2025 is $1.14 at the midpoint, in line with analyst estimates
EBITDA guidance for the upcoming financial year 2025 is $530 million at the midpoint, below analyst estimates of $645.9 million
Operating Margin: 1.6%, down from 6.9% in the same quarter last year
Free Cash Flow Margin: 4.7%, down from 7.2% in the same quarter last year
Sales Volumes fell 4.8% year on year (-1.6% in the same quarter last year)
Market Capitalization: $2.48 billion
Company Overview
Founded in 1996, Select Medical (NYSE:SEM) operates critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers across the US.
Outpatient & Specialty Care
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.
Sales Growth
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Select Medical grew its sales at a tepid 4% compounded annual growth rate. This was below our standard for the healthcare sector and is a poor baseline for our analysis.
Select Medical Quarterly Revenue
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. Select Medical’s recent history shows its demand slowed as its annualized revenue growth of 2.3% over the last two years is below its five-year trend.
Select Medical Year-On-Year Revenue Growth
Select Medical also reports its number of admissions, which reached 8,691 in the latest quarter. Over the last two years, Select Medical’s admissions averaged 1.1% year-on-year declines. Because this number is lower than its revenue growth, we can see the company benefited from price increases.
Select Medical Admissions
This quarter, Select Medical missed Wall Street’s estimates and reported a rather uninspiring 20.9% year-on-year revenue decline, generating $1.31 billion of revenue.
Looking ahead, sell-side analysts expect revenue to decline by 8.6% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and implies its products and services will see some demand headwinds.
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Operating Margin
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.
Select Medical was profitable over the last five years but held back by its large cost base. Its average operating margin of 8.8% was weak for a healthcare business.
Analyzing the trend in its profitability, Select Medical’s operating margin decreased by 2.5 percentage points over the last five years, but it rose by 1.4 percentage points on a two-year basis. Still, shareholders will want to see Select Medical become more profitable in the future.
Select Medical Trailing 12-Month Operating Margin (GAAP)
This quarter, Select Medical generated an operating profit margin of 1.6%, down 5.3 percentage points year on year. This contraction shows it was recently less efficient because its expenses increased relative to its revenue.
Earnings Per Share
Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.
Select Medical’s EPS grew at a solid 8.5% compounded annual growth rate over the last five years, higher than its 4% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.
Select Medical Trailing 12-Month EPS (GAAP)
Diving into the nuances of Select Medical’s earnings can give us a better understanding of its performance. A five-year view shows that Select Medical has repurchased its stock, shrinking its share count by 1.7%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.
Select Medical Diluted Shares Outstanding
In Q4, Select Medical reported EPS at negative $0.13, down from $0.36 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Select Medical’s full-year EPS of $1.65 to shrink by 3.3%.
Key Takeaways from Select Medical’s Q4 Results
We struggled to find many positives in these results as the company missed across all key operating metrics. Its full-year revenue and EBITDA guidance also fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 5.5% to $17.99 immediately following the results.
The latest quarter from Select Medical’s wasn’t that good. One earnings report doesn’t define a company’s quality, though, so let’s explore whether the stock is a buy at the current price. If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free.
