Encompass Health Corporation EHC has been witnessing impressive inorganic growth driven by several acquisitions and mergers (M&A) in the past several years.
The company keeps on constructing or acquiring new hospitals, while simultaneously purchasing or opening home health and hospice agencies. These activities underline the company’s intention to address demand for facility-based and home-based post-acute care services keeping with the needs for different markets.
During the first six months of 2020, Encompass Health has opened three new hospitals, which include two new ones in the second quarter at Iowa and South Dakota.
Acquisition Story
The healthcare provider has acquired two new home health locations and one new hospice location till date in 2020. These acquisitions are not only likely to boost revenues but also lead to an improved range of facility-based and home-based post-acute healthcare services. The buyouts are also expected to strengthen the company’s U.S. footprint, where it already has a strong base.
The company has been striving to offer improved healthcare services across the United States with a nationwide presence and strong portfolio of 136 hospitals, 245 home health hubs, and 83 hospice centers in 39 states and Puerto Rico.
Moreover, Encompass Health has laid plans for building eight and five new hospitals plan for 2021 and 2022, respectively.
Another company in the healthcare industry, The Ensign Group, Inc. ENSG has also been on an acquisition spree with regard to skilled nursing facilities. The company has closed 208 acquisitions in the last decade (2009-2019).
Rebound in Volumes Bodes Well
The company’s patient volumes have stayed under pressure in the second quarter owing to COVID-19 related stringent lockdown measures. Nevertheless, it has witnessed revival in patient volumes at its inpatient rehabilitation and home health and hospice segments from low volumes in April. This uptick in volumes continued in July as well.
Solid Liquidity Position
Encompass Health boasts of a robust liquidity position by virtue of free cash flows, high cash balance and revolving credit facility. These strong factors not only encourage the company to pursue prevalent growth opportunities but also enable it to return value to shareholders. Notably, it has modified its revolving credit facility in a bid to tide over the adverse pandemic effects by the end of 2021.
Shares of this Zacks Rank #3 (Hold) healthcare provider have gained 1.5% in a year compared with the industry’s growth of 3.1%.
High PPE Costs: A Possible Headwind
The higher utilization of personal protective equipment (PPE) in the face of the COVID-19 pandemic and higher unit cost continues to pose significant threat to the entire healthcare industry. Encompass Health, being part of this industry, isn’t an exception to the trend. PPE utilization has increased around 12 times for mask and four times for gowns in the company’s inpatient rehabilitation segment.
Stocks to Consider
Some better-ranked stocks in the medical space include Horizon Therapeutics Public Limited Company HZNP and Novavax, Inc. NVAX. While Horizon Therapeutics sports a Zacks Rank #1 (Strong Buy), Novavax carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Horizon Therapeutics and Novavax have a trailing four-quarter earnings surprise of 38.63% and 13.80%, on average, respectively.
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