Encompass Health Stock Gives Every Indication Of Being Modestly Overvalued

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GF Value
Mar 31, 2021
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The stock of Encompass Health (NYSE:EHC, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $82.8 per share and the market cap of $8.2 billion, Encompass Health stock is estimated to be modestly overvalued. GF Value for Encompass Health is shown in the chart below.

Encompass Health GF Value Chart

Because Encompass Health is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 5.7% over the past three years and is estimated to grow 6.09% annually over the next three to five years.

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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Encompass Health has a cash-to-debt ratio of 0.06, which is in the bottom 10% of the companies in the industry of Healthcare Providers & Services. The overall financial strength of Encompass Health is 4 out of 10, which indicates that the financial strength of Encompass Health is poor. This is the debt and cash of Encompass Health over the past years:

debt and cash

Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Encompass Health has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $4.6 billion and earnings of $2.85 a share. Its operating margin of 13.95% better than 81% of the companies in the industry of Healthcare Providers & Services. Overall, GuruFocus ranks Encompass Health's profitability as strong. This is the revenue and net income of Encompass Health over the past years:

Revnue and Net Income

Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Encompass Health's 3-year average revenue growth rate is in the middle range of the companies in the industry of Healthcare Providers & Services. Encompass Health's 3-year average EBITDA growth rate is 2.4%, which ranks in the middle range of the companies in the industry of Healthcare Providers & Services.

Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Encompass Health's return on invested capital is 8.99, and its cost of capital is 7.41. The historical ROIC vs WACC comparison of Encompass Health is shown below:

ROIC vs WACC

In summary, the stock of Encompass Health (NYSE:EHC, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in the industry of Healthcare Providers & Services. To learn more about Encompass Health stock, you can check out its 30-year Financials here.

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