Encompass Health Corporation (EHC): what the price assumes

In the published model solve dated 2026-Q2, anchored at $120.85, Encompass Health Corporation (EHC) is priced for -1.6% growth. boothcheck publishes no house fair value, target price, or buy/sell rating; individual model outputs and user-controlled scenarios are analytical inputs, not Boothcheck targets. Narrative composed 2026-07-25.

Generated: 2026-08-30 · Source: https://boothcheck.com/report/EHC

Headline

What The Price Assumes (Inversion)

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

Solve inputs: computed at a 7.6% cost of capital with 4% terminal growth over a 5-year stage.

How unusual the bet is: within-range (limited comparison data)

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.

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 7.7%); the inversion above states its own rate.

Per-Model Detail (n=12)

Economic-Unit Decomposition (Sum Of The Parts)

Only one reportable economic unit is present in the current topology source. Consolidated operating lenses remain available, but there is no multi-unit decomposition.

No total common-equity value is stated. One or more material units lack a supported unit value. The displayed values are an indicative subtotal; consolidated debt and cash cannot be applied to a fraction of the company.

Solvency

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

Bullet Takeaways

• Encompass Health ended 2025 with 173 inpatient rehabilitation hospitals and 11,465 licensed beds, up from 161 hospitals and 10,778 beds two years earlier, and treated 263,299 discharges against 229,480 in 2023.
• Washington sets the price here: Medicare accounts for about 65% of revenue and Medicare Advantage another 16%, and the 10-K notes that "MedPAC has recommended either no updates to payments or reductions to" inpatient rehab payment in every rulemaking cycle since 2008.
• The number to watch is same-store discharge growth, which ran 3.4% for full-year 2025 and slowed to 1.6% in the first quarter of 2026.

Bull Case

The strangest thing in this data is what the price does not ask for. At roughly 15 times operating profit, today's price embeds company-wide operating profit shrinking about 2.8% a year for the next five years. Not slowing. Shrinking. That is the assumption a buyer is implicitly disagreeing with, and it is worth holding next to what the company has actually been doing: adding twelve hospitals and 687 licensed beds over two years, and lifting discharges from 229,480 in 2023 to 263,299 in 2025.

The demand side is about as legible as demand gets. The 10-K puts it plainly: the average age of an Encompass Health Medicare patient is approximately 77, and the population aged 75 and older is expected to grow at approximately 4% a year through 2030. Rehabilitation after a stroke or a hip fracture is not discretionary spending, and it is not something a patient defers because rates went up. The company is building into that: eight new hospitals with 389 beds are planned for 2026, along with roughly 175 beds added to existing facilities.

Scale in this business is not a vanity metric, and the gap to the next operator is wide. Encompass Health ran 173 hospitals at the end of 2025. SEM, the closest listed comparison in the same setting, reports in its own 10-K that it "operated 38 rehabilitation hospitals in 15 states" at the same date. Density matters because referrals come from acute-care hospitals that discharge patients within a few days, so being the operator with a bed nearby is most of the sale. It also matters because the fixed costs of clinical protocols, regulatory compliance and payor negotiation spread across 173 buildings rather than 38. The company builds its own capacity too: the 10-K describes de novo and bed addition strategies that "incorporate pre-fabrication construction technology to create efficiencies by reducing reliance on subcontractors" and shorten time to opening.

Pricing has been moving the right way even under a government-set rate. The 2026 rule implemented a net 2.6% market basket increase for discharges between October 1, 2025 and September 30, 2026, and the company's own analysis puts the effect on its Medicare payment rates at approximately 2.9%. That lands on top of volume. In the first quarter of 2026, revenue rose 9.0% to $1,586.6 million, discharges rose 4.3% to 67,763, and net patient revenue per discharge reached $22,633 against $21,816 a year earlier.

Quality is the piece that makes the Medicare Advantage relationship survivable rather than merely painful. At the end of 2025, 148 of the 173 hospitals held stroke-specific certifications, and the company's stated strategy is to demonstrate its value to Medicare Advantage payors through "higher discharge to community rates and lower lengths of stay, compared to alternative sites of care". A payor trying to hold down total episode cost has a real reason to send a stroke patient somewhere they will recover faster and go home instead of to a nursing facility. That argument only works if the outcome data holds up. So far it has.

Bear Case

The thing that protects this business is also the thing that constrains it, and the constraint is tightening. An inpatient rehabilitation facility earns its favorable payment rate by satisfying what the 10-K describes as a Medicare requirement "that at least 60% of an IRF's patients must have a diagnosis or qualifying comorbidity from at least one of 13 specified medical conditions". That rule keeps general hospitals from simply relabeling beds, which is the moat. It is also a leash held by the agency that writes the rule, and the agency has been advised for a long time to pull it. Since 2008, in every annual rulemaking cycle, MedPAC has recommended no update or an outright reduction to inpatient rehabilitation payment. CMS has not adopted that advice. It has, however, said it is considering whether to modify the transfer payment policy so that early discharges to home health are reimbursed at a per diem rate rather than the full case rate, which would take money out of exactly the shorter, better-outcome stays the company markets as its advantage.

The second erosion is in who pays. Traditional Medicare is about 65% of revenue and generally reimburses at higher rates than the alternatives, while Medicare Advantage is 16% and growing. The 10-K describes what that shift brings with it: third-party intermediaries whose economics run the other way, where "conveners customarily suggest that patients avoid higher acuity post-acute settings altogether or move as soon as practicable to lower acuity settings". Every percentage point that migrates from traditional Medicare to a managed plan is a point where someone else gets a vote on how long the patient stays.

The volume data already shows the friction. Same-store discharge growth was 3.4% for 2025. In the first quarter of 2026 it was 1.6%. Headline discharge growth stayed healthy at 4.3% because new hospitals opened, which is a different thing: buying growth with capital rather than harvesting it from existing beds. The cohort tells a similar story. ACHC's own filing reports same-facility revenue growth of 4.9% in 2025 against 7.7% in 2024, with patient days growth of 2.1%. Post-acute volumes across the group are decelerating at once, which points at the payors rather than at any one operator's execution.

Costs move on their own schedule, and the 10-K is explicit about the mismatch: "Because a significant percentage of our revenues consists of fixed, prospective payments", a rise in staffing costs cannot simply be passed through. Therapists and nurses are priced by a national labor market; the revenue line is priced annually by CMS. In a year where those two diverge, the gap lands entirely in the operating line.

Financing costs are moving too, and here the numbers are concrete. On May 29, 2026 the company sold $500 million of 5.875% senior notes due 2034 and used the proceeds to redeem $400 million of its 4.500% notes due 2028 and repay $100 million drawn on the revolver. That is roughly 1.4 percentage points more coupon on the refinanced portion, against net borrowings of about $2.76 billion. The remaining $400 million of the 2028 notes has to be dealt with as well. None of this is distress. It is simply the slow arithmetic of a capital-intensive builder financing beds at higher rates than the ones the old beds were financed at, while the price it charges for those beds is set by somebody else.

Valuation

Start with what today's price is actually assuming, because it is not what most people would guess for a hospital operator opening eight new facilities this year. The price works out to roughly 15 times company-wide operating profit, and inverted over a five-year stage at a 7.7% cost of capital with 4% terminal growth, it embeds operating profit declining about 2.8% a year. The market is not paying for expansion here. It is paying for a modest, orderly fade.

Two caveats belong with that figure rather than after it. The arithmetic is unusually rate-sensitive: each additional percentage point of cost of capital moves the implied path by roughly 6.5 points a year, so the difference between a 7.7% discount rate and an 8.7% one is the difference between a company assumed to shrink and one assumed to grow. And the assumed pace is not far from what the company's own recent operating record has produced, which is why this reads as within-range rather than as a demanding bet.

The methods mostly agree, which is unusual and is itself the finding. Priced against book value plus profitability, the price sits about 1.45 times where the asset-value methods land. Against capitalized earnings, about 1.16 times the earnings-power methods; against the growth-projection method, about 1.14 times. And against peer multiples the price sits below the family, at roughly 0.81 times where that lens puts it. No family calls this expensive, and the one built on what comparable companies actually trade for calls it the opposite. The split inside the peer methods explains why: the ones that credit the recent earnings growth rate, which has been rapid, land well above today's price, while a static sector price-to-earnings reference lands below it. Whether the growth rate persists is the whole question, and no method answers it.

Cohort scale sharpens the picture more than percentile ranking would. UHS carries $17.76 billion of revenue growing 10.4% year over year and an operating margin of 11.5%. SEM carries $5.52 billion growing 5.8% at an operating margin of 5.83%. ACHC carries $3.37 billion growing 6.8%, and posted a negative profit margin over the trailing period. Encompass Health sits in the middle of that range on size, at roughly $6.1 billion of revenue, and grew 9.0% in the first quarter of 2026, faster than two of the three. It is the only one of the four that is a pure inpatient rehabilitation operator, which is why the peer read should be handled as a reference rather than a verdict.

The balance sheet supports the bet without changing it. Net borrowings run about $2.76 billion against gross borrowings of $2.87 billion, and first-quarter operating cash flow was $313.1 million. The share count has barely moved, growing about 0.1% a year over the four years to March 2026, so the growth that arrives is not being divided among more owners. What the debt does do is set a floor under the return the new hospitals must earn. The notes sold in May carry a 5.875% coupon and replaced paper issued at 4.500%, so each refinancing raises the return a new hospital has to earn before it adds anything for shareholders.

Catalysts

First-quarter results on April 30, 2026 came with a guidance raise. Net operating revenue rose 9.0% to $1,586.6 million, income from continuing operations attributable to Encompass Health was $1.77 per diluted share against $1.48 a year earlier, and full-year FY2026 net operating revenue guidance moved to a range of $6,375 million to $6,470 million from $6,365 million to $6,470 million. The operating detail underneath was volume plus price in roughly equal measure: discharges of 67,763 against 64,985, and net patient revenue per discharge of $22,633 against $21,816.

Capacity additions are the visible schedule for the rest of the year. A 49-bed hospital opened in Irmo, South Carolina during the first quarter, with 44 beds added across existing facilities, and the company expects to open eight hospitals totaling 389 beds in 2026 plus roughly 175 additional beds at existing sites. The 10-K's project list names de novo openings scheduled through the year in Concordville and Norristown, Pennsylvania, San Antonio, Bangor, Avondale and Loganville, Georgia. Each opening carries start-up losses before it fills, so the timing of these matters to reported results as much as the total does.

The financing calendar moved in May and June. On May 29, 2026 the company completed a $500 million offering of 5.875% senior notes due 2034 for net proceeds of approximately $491.2 million, redeeming $400 million of the $800 million of 4.500% notes due 2028 and repaying $100 million of revolver borrowings. On the reimbursement side, the rate for the current Medicare fiscal year is already set: a net 2.6% market basket increase for discharges between October 1, 2025 and September 30, 2026, which the company expects to translate to roughly a 2.9% increase in its own Medicare payment rates. The next rule, covering fiscal 2027, is the item on the regulatory calendar that carries the most weight.

Peer Cohorts (Per Segment, With Filing Citations)

Inpatient rehabilitation (single reportable segment) (reported)

• ACHC (Acadia Healthcare Company, Inc.)
• FY2025 10-K: …services, the Company recognizes revenue equally over the patient stay on a daily basis. For outpatient services, the Company recognizes revenue equally over the number of treatments provided in a single episode of care. Typically, patients and third-party payors are billed within several days of the service being…
• FY2025 10-K: …31, 2025 2024 Same Facility Results (a) Revenue growth 4.9% 7.7% Patient days growth 2.1% 3.2% Admissions growth 2.3% 1.3% Average length of stay change (b) -0.2% 1.9% Revenue per patient day growth 2.8% 4.3% (a) Results for the periods presented include facilities we have operated more than one year and exclude…
• SEM (SELECT MEDICAL HOLDINGS CORP)
• FY2025 10-K: …that refer patients to our rehabilitation hospitals. We provide our facilities within our rehabilitation hospital segment with centralized accounting, treasury, payroll, legal, operational support, human resources, compliance, management information systems, health information, credentialing, physician contracting…
• FY2025 10-K: …conditions requiring rehabilitative healthcare services in an inpatient setting. These conditions require targeted therapy and rehabilitation treatment, including comprehensive rehabilitative services for brain and spinal cord injuries, strokes, amputations, neurological disorders, orthopedic conditions, pediatric…
• UHS (UNIVERSAL HEALTH SERVICES, INC.)
• FY2025 10-K: …results reflected on the table below also exclude from net revenues and other operating expenses, provider tax assessments incurred in each period as discussed below Sources of Revenue-Summary of Various State Medicaid Supplemental Payment Programs. However, these provider tax assessments are included in net revenues…
• FY2025 10-K: …pursuant to IRC section 162(m). Adjustments to self-insured professional and general liability reserves: Our estimated liability for self-insured professional and general liability claims is based on a number of factors including, among other things, the number of asserted claims and reported incidents, estimates of…

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.
• Economic-unit decomposition (SOTP): each disclosed business unit is assigned its native valuation basis before any multiple is applied. Operating units are valued on enterprise value; funded financial units are valued on their own common equity, because their borrowings fund earning assets rather than levering the parent. A company total is stated only once every material unit carries a supported value and the parent capital bridge reconciles.
• 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.