Encompass Health (EHC): Neutral Outlook, Key Levels to Watch

The company is the nation's largest owner and operator of inpatient rehabilitation hospitals, providing specialized rehabilitative treatment. Its core business involves operating 166 inpatient rehabilitation hospitals across 38 states and Puerto Rico as of December 31, 2024. The primary customers are individuals requiring post-acute care, often admitted from acute-care hospitals following physician referrals for conditions like strokes, hip fractures, and neurological disorders. The company's business strategy centers on expanding its network of inpatient rehabilitation hospitals and strengthening relationships with healthcare systems and payors to connect patient care across the healthcare continuum. It aims to differentiate itself by delivering superior patient outcomes cost-effectively and by holding stroke-specific certifications, demonstrating effective use of evidence-based clinical practice guidelines to manage and optimize stroke care. The company also focuses on developing post-acute solutions, recruiting and retaining a qualified clinical workforce, and deploying on-site hemodialysis systems to improve patient care and satisfaction.

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EHC's technical outlook appears mildly bearish. The recent close at $117.23 represents a slight increase from $116.07, but the overall trend has been downwards over the past 90 days. A significant drop occurred mid-July, pulling the price from the $120s down to the $100s, with subsequent recovery attempts proving weak. The price remains below its 50-day SMA of $124.09, and also below its 21-day EMA of $122.67, indicating persistent downward pressure. Momentum indicators are also concerning. The MACD is negative and trending further downwards, with MACDh at -1.16, suggesting increasing bearish momentum. The RSI is at 33.49, signaling oversold conditions, but this may simply reflect strong downward momentum rather than an immediate buying opportunity. The Stochastic Oscillator is at 40, indicating potential for further declines. The ADX is relatively high at 30.48, suggesting a strong trend is in place, which in this case is bearish. While there was a bounce from $113.85 to $117.23, the technical picture suggests that EHC is likely to face continued challenges in the coming 1-3 months.

Encompass Health's MD&A paints a generally positive, yet nuanced picture. `Net operating revenues` increased by 9.4% for the three months ended September 30, 2025, compared to the same period in 2024, driven by 'increased volumes and favorable pricing'. For the nine months ended September 30, 2025, `Net operating revenues` increased 10.6%. Medicare continues to be the primary payor source, accounting for 64.1% and 65.2% of revenues for the three and nine month periods respectively. While salaries and benefits decreased as a percentage of `Net operating revenues`, other operating expenses increased. `Net cash provided by operating activities` for the nine months ended September 30, 2025 was $829.6 million, up from $724.0 million in the prior year, which 'primarily resulted from an increase in Net income which was driven by growth in Net operating revenues'. The company remains optimistic about long-term prospects, citing demographic trends like 'population aging' and the expected growth in Medicare enrollees. Management highlights a 'strong, well-capitalized balance sheet' and 'ample availability under our revolving credit facility', suggesting financial flexibility. However, they acknowledge challenges including regulatory uncertainty and the need to maintain strong volume growth and recruit/retain high-quality personnel.

Encompass Health's Q2 2025 earnings call projects a bullish outlook, driven by strong performance and raised guidance. Mark Tarr stated that Q2 discharge growth 'facilitated an increase of 12% in revenue and 17.2% in adjusted EBITDA,' showcasing significant operational efficiency. Consequently, the company is 'again increasing our 2025 guidance,' with net operating revenue projected between $5.88 billion and $5.98 billion, adjusted EBITDA between $1.22 billion and $1.25 billion, and adjusted earnings per share between $5.12 and $5.34. The company's focus on complex medical conditions, particularly neurological and stroke-related cases, has contributed to this success, with neurological conditions growing 12% and stroke growing 6.7% in the quarter. Furthermore, the company's strong free cash flow, now expected to be between $705 million and $795 million, allows for increased capital expenditure on bed expansions and de novo facilities, as well as share repurchases and dividend increases, signaling confidence in future growth.

EHC's financial performance reveals a concerning trajectory. Revenue has shown an upward trend, increasing from $1,246.8M in Q4 2023 to $1,477.5M in Q3 2025, indicating positive top-line growth. However, the gross profit ratio has been volatile, starting at 0.194 in Q4 2023 and reaching 0.468 in Q3 2025. A significant red flag is the drastic shift in operating cash flow, which plummeted from $201M in Q4 2023 to a negative -$561.3M in Q3 2025, suggesting severe liquidity issues. Simultaneously, total debt has decreased from $2,932.8M in Q4 2023 to $267.7M in Q3 2025. While the revenue growth and gross profit ratio improvement are positive, the severely negative operating cash flow and debt reduction raise serious concerns about the company's operational efficiency and financial sustainability in the near term. The company needs to address its cash flow problems urgently to ensure long-term viability.

The company presents a moderately bullish investment profile based on its financial data. Revenue has shown positive growth, indicating increasing market demand or successful market penetration. The gross margin is healthy, suggesting efficient cost management in production or service delivery. A strong return on equity (ROE) signals effective utilization of shareholder investments to generate profit. The price-to-earnings (P/E) ratio suggests the stock is trading at a premium, but this could be justified by the company's growth prospects and profitability. A manageable debt-to-equity ratio indicates a reasonable level of financial leverage. The current ratio, being greater than 1, demonstrates the company's ability to cover short-term liabilities with its current assets, further solidifying its financial health. Overall, the combination of revenue growth, healthy profitability metrics, and a solid balance sheet makes the company an attractive investment for the next 12 months, although the elevated P/E ratio warrants careful monitoring.