JMP Upgrades HealthSouth On Accelerating Top-Line, EBITDA Growth

In a report published Thursday, JMP Securities analyst Peter L Martin upgraded the rating on

from Market Perform to Market Outperform, with a price target of $54. HealthSouth's top-line and adjusted EBITDA growth is expected to accelerate, as the company integrates the acquisition of Reliant and allocates growth capital to its Home Health & Hospice division. "Following several unexpected items in 1H15, we believe HLS is poised to meet current 2015 guidance and provide strong 2016 adj. EBITDA guidance once the Reliant deal is closed. Furthermore, we believe HLS is more inclined to use its balance sheet for strategic growth, which, in our opinion, should generate upside to current consensus estimates that are based on organic metrics," analyst Peter L. Martin mentioned. The company's strengths lie in its sector leadership, strong management and healthy balance sheet that enable it to capitalize on strategic growth opportunities. The revenue growth estimates for 2015 and 2016 have been raised from 6.7 percent to 7.2 percent and from 6.6 percent to 6.9 percent, respectively, to reflect higher revenue per discharge growth. The EPS estimate for 2015 has been reduced from $2.33 to $2.24 to reflect a $25 million increase in nonrecurring expenses. The EPS estimate for 2016 has been raised from $2.54 to $2.70. HealthSouth's stock valuation depends on the strength of the reimbursement environment. "Given the benign near-term outlook for reimbursement risk, the pending inclusion of $80-$90mm in Adj. EBITDA from Reliant, and our view for strong organic and deal growth in the Home Health division, we believe HLS should trade at 9-9.5x versus our recent multiple expectation of 8-8.5x," Martin added.