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Select Medical Holdings Corporation (SEM): Should Investors Buy This Specialty Hospital Operator Now?

Since the beginning of the year, Select Medical Holdings Corporation (NYSE:SEM) has been declining, from $9.90 per share to only $7.85 per share. To take advantage of the falling price, many famous investors, including Joel Greenblatt, Wilbur Ross, Chuck Royce, and Steven Cohen, have accumulated Select Medical for their own portfolios. Should others follow these successful investors into Select Medical?

Select Medical Holdings Corporation (NYSE:SEM)

Consistent growth in revenue and earnings

Select Medical Holdings Corporation (NYSE:SEM) is considered one of the biggest specialty hospital and outpatient rehabilitation clinic operators in the U.S., operating in two main business segments: Specialty Hospitals and Outpatient Rehabilitation. The company currently operates around 122 specialty hospitals and 979 facilities in many states in the U.S. and the District of Columbia. Most of its revenue, $2.2 billion, or nearly 74.6% of the total revenue, was generated from the Specialty Hospitals segment, while the Outpatient Rehabilitation segment contributed only $751.3 million to 2012 revenue. The Specialty Hospitals segment is also the bigger EBITDA generator, with more than $381.3 billion in adjusted EBITDA, whereas the adjusted EBITDA of the Outpatient Rehabilitation came in at $87 million.

In the past five years, Select Medical Holdings Corporation (NYSE:SEM) has experienced consistent growth in both top-line and bottom-line. Revenue increased from $2.15 billion in 2008 to nearly $2.95 billion in 2012. The net income, after preferred dividends, rose from $3 million, or $0.01 per share, to $148 million, or $1.05 per share, during the same period. What I don’t like about Select Medical Holdings Corporation (NYSE:SEM) is its high leverage. As of March 2013, it had $743 million in equity, only $5 million in cash, and as much as $1.5 billion in both long and short-term debt. The company is trading at $7.85 per share, with the total market cap of around $1.1 billion. The market values Select Medical at 6.65 times its trailing EBITDA.

How about HealthSouth and Kindred Healthcare?

Compared to its peers, including HEALTHSOUTH Corp. (NYSE:HLS) and Kindred Healthcare, Inc. (NYSE:KND), Select Medical Holdings Corporation (NYSE:SEM)’s valuation is in between. HealthSouth has the highest valuation among the three. It is trading at $29.20 per share, with the total market cap of $2.55 billion. The market values HealthSouth at 7.47 times its trailing EBITDA. HealthSouth operates around 102 inpatient rehabilitation hospitals and 22 outpatient rehabilitation satellite clinics, generating around $2.2 billion in revenue and having 849,410 outpatient visits in the past four quarters. The company reported that it has around 9% of the total inpatient rehabilitation hospitals in the U.S., with a 21 % market share in terms of total patients served. In 2012, the company had repurchased $46 million of convertible perpetual preferred stock, strengthening the company’s balance sheet position. In the period of 2013-2015, HEALTHSOUTH Corp. (NYSE:HLS) expects to growth its adjusted EBITDA at around 4%-8% compounded annual growth rate and as high as 10%-14% growth in adjusted free cash flow.

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