Encompass Health Corporation (EHC): what the price requires

Generated: 2026-07-13 · Source: https://boothcheck.com/report/EHC

Headline

Field	Value
Ticker	EHC
Company	Encompass Health Corporation
Current price	$110.25/sh
Composition	Medicare 65% / Medicare Advantage 16% / Managed care 11% / Medicaid 3% / Other third-party payors 1% / Workers' compensation 1% / Patients 0% / Other income 3%

What The Price Requires (Inversion)

The assumption today's price embeds, recovered by inverting the valuation.

Field	Value
Inversion basis	whole-company
Implied growth	-3.5%
Multiple paid	15x operating income

Solve inputs: computed at a 7.6% cost of capital with 4% terminal growth over a 5-year stage; each 1pp of cost of capital moves the implied operating-profit growth ~6.5pp.

Reconcile: at the x-ray's 9.3% required return this reads ~6.7%/yr; the models below use their own rates.

How unusual the bet is: within-range

Reference	Value
vs own history	-0.66σ
cohort percentile (of 112 peers)	23
implied end-window share	0%

Valuation X-Ray

The price is supported by earnings-power and relative-multiple and growth-DCF value. A value/asset-supported name, not a pure growth bet.

How the valuation models price the stock relative to the market price. Price/FV above 1.0 means the market pays more than that lens defends (expensive); at or below 1.0 the lens can defend the price.

Family	Median price/FV	Models	Reads
Asset	1.42x	4	expensive
Earnings	1.14x	2	expensive
Relative	0.79x	5	justifies
Growth	1.13x	1	expensive

Families that justify the price: Earnings, Relative, Growth

The models below discount at their own flat-beta convention rates (cost of equity 9.3%, WACC 7.6%); the inversion above states its own rate.

Per-Model Detail (n=12)

Model	Family	FV	Price/FV	Applicable	Methodology
DCF Perpetual Growth	Growth	$0.00	—	no	Negative/zero FCF — equity value floored at $0
DCF Exit Multiple	Growth	$0.00	—	no	Negative/zero FCF or EBITDA — equity value floored at $0
Relative Valuation	Relative	$81.27	1.36x	yes	P/E 18x (sector median), scenarios: 14.9x / 18.0x / 21.1x (bear / base = sector held flat / bull), EV/EBITDA 20.69x
Simple DDM	Growth	—	—	no	—
Two-Stage DDM	Growth	—	—	no	—
Simple Excess Return	Asset	$65.47	1.68x	yes	BV/sh $25.07, ROE (TTM) 24.2%, ke 9.3%
Two-Stage Excess Return	Asset	$105.99	1.04x	yes	5yr excess ROE then converge to ke=9.3%
Discounted Future Market Cap	Growth	$97.14	1.13x	yes	Rev $6.1B, growth 10% (input: historical growth; tapered), Terminal P/S: 1.5x / 1.8x / 2.1x (bear / base = today's held flat / bull, cap 8x)
Peter Lynch Fair Value	Relative	$138.79	0.79x	yes	EPS $5.99, growth 23% (input: historical EPS growth), PEG=0.79 (Undervalued)
Margin Trajectory	Growth	—	—	no	—
Earnings Power Value	Earnings	$0.01	11025.00x	yes	Normalized EBIT (5y avg op income, one-time charges added back) $0.19B × (1−20%) / WACC 7.6% → EPV (no growth) (excluded from median)
Residual Income	Asset	$96.12	1.15x	yes	BV $25.07 + 5yr PV of (ROE (TTM) 24.2% − Kₑ 9.3%) × BV; BV grows 8.8%/yr
Graham Number	Asset	$58.12	1.90x	yes	√(22.5 × EPS $5.99 × BVPS $25.07) — Graham's conservative floor
EV/EBITDA Relative	Relative	$13.45	8.20x	yes	EBITDA $0.34B × sector EV/EBITDA 12.0x
FCF Yield	Earnings	—	—	no	—
SBC-Adj FCF Yield	Earnings	—	—	no	—
Ben Graham Formula	Earnings	$193.28	0.57x	yes	EPS $5.99 × (8.5 + 2×15.0%) × (4.4 / 5.3%)
ROIC-Justified P/B	Asset	—	—	no	—
P/Sales Sector	Relative	$150.76	0.73x	yes	Revenue $6.07B × sector P/S 2.5x
PEG Fair Value	Relative	$208.18	0.53x	yes	EPS $5.99 × (PEG 1.5 × growth 23.2% (input: historical EPS growth)) → PE 34.8x
Earnings Yield	Earnings	$64.76	1.70x	yes	EPS $5.99 / required return 9.3% (Rf 4.3% + ERP 5.0%)
Funds From Operations Multiple	Relative	—	—	no	—
Clinical Phase NPV	Growth	—	—	no	—
Merton	Asset	—	—	no	—
V5 Mechanical	—	—	—	no	—

Solvency

Field	Value
Net debt	$2.8b
Net debt / NOPAT (after-tax)	3.60x
Net debt / operating income (pre-tax)	2.89x
Share count CAGR (buyback)	-5.5%
Burning cash	no

Interest expense is not separately reported in the latest filings, so interest coverage cannot be computed.

Bullet Takeaways

Encompass is the largest U.S. inpatient-rehabilitation operator, a mature compounder in a demographically growing niche: first-quarter 2026 revenue rose 9% to $1.59 billion, adjusted EBITDA rose 11.2% to $348.8 million, and management raised full-year guidance to revenue of $6.375 billion to $6.470 billion and adjusted EPS of $5.89 to $6.11.

Growth comes mainly from beds: discharge growth was 4.3% but same-store was a modest 1.6% (partly offset by closures), so the organic engine is slower than the headline, and the bed-addition and de novo strategy (using pre-fabrication) is what keeps volume compounding.

The dominant risk is Medicare reimbursement, which sets the price for more than 80% of revenue (65% Medicare plus 16% Medicare Advantage); the price implies about 8.8% annual operating growth for five years (roughly 24x operating income) and assumes favorable reimbursement continues, with net debt above 5x operating income amplifying both the regulatory and execution outcomes.

Bull Case

Encompass Health is best understood as a mature operator sitting inside a structurally growing niche, and that framing is what the numbers reward. It is the largest U.S. operator of inpatient rehabilitation hospitals, the facilities where patients go to recover after strokes, hip replacements, and other major events, and demand for that care rises mechanically as the population ages. The company is not a speculative growth story and not a slow-decay value name; it is a steady compounder adding capacity into a tailwind. Reading the numbers through that lens, an 8.9% operating margin, a 24.2% return on equity, and double-digit EPS make sense for a business with pricing power inside a regulated, demand-favored corner of healthcare.

The growth is coming from beds, and Encompass has built a repeatable machine to add them. The first quarter of 2026 delivered 9% revenue growth to $1.59 billion, with discharge growth of 4.3% (1.6% same-store) and net revenue per discharge up 3.7%. The 10-K describes a de novo and bed-addition strategy that incorporates pre-fabrication to build new hospitals efficiently and a platform approach that identifies and spreads best practices across hospitals (FY2025 10-K, accession 0000785161-26-000081). Pre-fabricated construction lowers the cost and time to open each new hospital, which is how a mature operator keeps compounding volume rather than just raising price.

The pricing and capital picture support the multiple. Net revenue per discharge grew 3.7%, helped by patient mix and a favorable Medicare adjustment, and the proposed Medicare rule includes a 2.4% market-basket update that would lift pricing for Medicare patients beginning October 2026. Management raised full-year 2026 guidance to revenue of $6.375 billion to $6.470 billion, adjusted EBITDA of $1.35 billion to $1.38 billion, and adjusted EPS of $5.89 to $6.11. Inverting the price, the market pays about 24x company-wide operating income, implying roughly 8.8% annual operating growth for five years, which is within what Encompass has recently delivered. For a business with a demographic tailwind, a proven bed-expansion model, and annual Medicare price escalators, the bet is on continuation, and continuation is what it keeps delivering.

Bear Case

The variable with the most leverage over Encompass is one the company does not control: Medicare reimbursement. Roughly 65% of revenue comes directly from Medicare, and another 16% from Medicare Advantage, so the federal government effectively sets the price for more than 80% of the business. The 10-K underscores the dependence, noting the regulations require annual cost-report submissions and that the company operates in a dynamic, highly regulated industry where success depends on adapting to it (FY2025 10-K, accession 0000785161-26-000081). The proposed 2.4% market-basket update is helpful this year, but it is proposed, not guaranteed, and the long-run risk is a policy shift, a payment-model change, or a budget-driven squeeze that compresses the margin on the majority of revenue. A single adverse Medicare rule can do more damage than years of operating improvement can offset.

The balance sheet adds financial leverage on top of the regulatory leverage. Net debt sits near $2.76 billion against trailing operating income of about $539 million, a net-debt-to-operating-income ratio above 5x, with interest coverage of about 4.4x. That debt funds the bed-expansion program, but it also means the equity is leveraged to both the Medicare price and the cost of the capital that builds the hospitals. If reimbursement tightens or construction costs rise, the leverage cuts the wrong way.

The valuation leaves limited room for a regulatory disappointment. The price is supported by the earnings-power, relative-multiple, and growth frames, but the asset-based simple excess-return model marks near $65 and the relative P/E frame near $79, both below the $98 price (June 27, 2026). The implied 8.8% operating growth must persist for five years, and while that is within the recent pace, it bakes in continued favorable reimbursement, steady same-store discharge growth (which was a modest 1.6% this quarter, partly offset by hospital closures), and successful capacity additions all at once. The same-store number is the quiet concern: most of the headline discharge growth came from new beds, not from existing hospitals filling up faster, so the organic engine is slower than the total suggests. The bear case is that this is a good, leveraged business whose price assumes the regulator stays friendly, and the regulator is the one thing management cannot guarantee.

Valuation

Encompass should be read as a mature, leveraged compounder, and its models support a roughly fair-to-modestly-rich valuation. The frames that fit the business cluster reasonably: the two-stage excess-return model marks near $106, residual income near $96, and the discounted-future-market-cap frame near $86, bracketing the $98 price. The relative P/E frame at an 18x sector multiple marks lower, near $79, and the simple excess-return model near $65, while the Peter Lynch frame marks higher, near $139, on the company's strong recent EPS growth. The earnings-power value frame is unreliable here (it marks near zero because the five-year average operating income it uses is distorted by earlier one-time items) and should be disregarded.

Inverting the price gives the cleanest read. At $98.01 the market pays about 24x company-wide operating income, implying roughly 8.8% annual operating growth for five years at a 7.6% cost of capital. The implied operating margin near 2.1% sits well below the current 8.9%, which means the inversion is not demanding margin expansion, only sustained top-line and volume growth. That near-term pace is within what Encompass has recently delivered, so the stretch is duration, not an implausible step.

The honest read: Encompass is fairly priced for a steady compounder with a demographic tailwind and a working bed-expansion model, where the upside is continued volume and price growth and the central risk is the Medicare reimbursement that sets the price for most of the revenue. The leverage (net debt above 5x operating income) amplifies both the reimbursement and the execution outcomes, so the valuation is reasonable only if the regulatory and growth assumptions hold.

Catalysts

The most recent print was the first-quarter 2026 report on May 1, and it raised guidance. Revenue grew 9% to $1.59 billion and adjusted EBITDA rose 11.2% to $348.8 million, driven by 4.3% discharge growth (1.6% same-store) and a 3.7% increase in net revenue per discharge, helped by patient mix and a favorable Medicare adjustment. Management raised full-year 2026 guidance to net operating revenue of $6.375 billion to $6.470 billion, adjusted EBITDA of $1.35 billion to $1.38 billion, and adjusted EPS of $5.89 to $6.11.

The most important policy catalyst is the Medicare payment rule. The proposed rule includes a net market-basket update of 2.4%, which the company estimates would translate to a 2.4% pricing increase for Medicare patients beginning October 1, 2026. The finalization of that rule is the single event with the most leverage on next year's earnings.

The forward thesis tracks reimbursement, volume, and capacity. The supportive drivers are the aging-population demand tailwind, the bed-addition and de novo expansion program (using pre-fabrication to open hospitals efficiently), and annual Medicare price escalators. The risks are any adverse change to Medicare or Medicare Advantage payment policy, the modest same-store discharge growth, and the financial leverage funding the expansion. Watch the finalized Medicare rule, same-store discharge trends (the organic-growth signal beneath the new-bed headline), the cadence of new hospital openings, and net revenue per discharge, since those determine whether the roughly 8.8% growth the price assumes is sustained.

Sources: Encompass Health Q1 2026 results and 8-K (stocktitan.net, Globe and Mail); Encompass Health Q1 2026 earnings call (Motley Fool, AOL, Benzinga, gurufocus.com); Encompass Health Q1 2026 highlights (Yahoo Finance).

Peer Cohorts (Per Segment, With Filing Citations)

Inpatient rehabilitation (single reportable segment) (reported)

• ACHC (Acadia Healthcare Company, Inc.)
• (no filing in the citation store)
• SEM (SELECT MEDICAL HOLDINGS CORP)
• (no filing in the citation store)
• UHS (UNIVERSAL HEALTH SERVICES, INC.)
• (no filing in the citation store)

Methodology Note

• Priced-in inversion: the valuation is inverted on the current price to recover the operating-income growth, duration, and steady-state margin the price embeds (ROE for financials, FFO growth for REITs).
• Valuation x-ray: the valuation models, grouped into four families (asset, earnings, relative, growth). Each model is expressed as a price/FV ratio (distance from price), not a point fair-value estimate. The spread across families is the disagreement.
• Solvency: net cash/debt, net-debt-to-NOPAT, interest coverage, and share-count CAGR from EDGAR financials (net debt / FFO and fixed-charge coverage for REITs; regulatory-capital framing for financials).
• Peer cohorts: per-segment comparables with deep-linkable SEC filing citations.

Fundamentals sourced from SEC EDGAR filings. Current price from Databento. The priced-in inversion and valuation x-ray are computed by the boothcheck engine; narrative composed by AI from the structured data.