Select Medical: Solid For Now: But What About Healthcare Reform?

Sales and profits notably better; strong stock buyback; very high insider ownership.

New healthcare reforms; highly leveraged. Select Medical Holdings Corporation (NYSE:

), through its subsidiary, Select Medical Corporation, operates specialty hospitals and outpatient rehabilitation clinics in the United States. The company's Specialty Hospitals segment offers long term acute care hospital services and inpatient acute rehabilitative hospital care. It provides services for various medical conditions, such as respiratory failure, neuromuscular disorders, traumatic brain and spinal cord injuries, strokes, non-healing wounds, cardiac disorders, renal disorders, and cancer. As of June 30, 2011, it operated 110 long term acute care hospitals and 9 inpatient rehabilitation facilities in 28 states. Outpatient Rehabilitation operates clinics; and provides physical, occupational, and speech rehabilitation services. It offers medical rehabilitation services on a contract basis at nursing homes, hospitals, assisted living and senior care centers, schools, and worksites. This group also provides specialized programs, such as hand therapy or sports performance enhancement that treat sports and work related injuries, musculoskeletal disorders, chronic or acute pain, and orthopedic conditions. As of June 30, 2011, it operated 952 outpatient rehabilitation clinics in 34 states and the District of Columbia. Select Medical Holdings Corporation was founded in 1996 and is headquartered in Mechanicsburg, Pennsylvania. SEM is up over 25% in the last 3 months. Investors are beginning to believe analysts' earnings estimates. Earnings were 48 cents in 2010. This year consensus from 9 analysts is 78 cents. For 2012, they expect 89 cents. For this year's fourth quarter, look for 19 cents vs 13 cents last year in the fourth, almost a 50% improvement. Even with a sputtering economy, things are good for SEM. Third quarter results give an indication of the positive trend SEM is in. Net operating revenues were up 18% to almost $700 million. Earnings were higher by more than three times to 17 cents a share (compared to 5 cents in 2009's third quarter). Specialty Hospital group saw revenues bumped by 24% to $521 million. About 70% of the increase was due to the acquisition of Regency Hospital last year (an acute care hospital based in Alpharetta, Georgia with 23 long-term acute care hospitals in 9 states). Internal growth showed a decent 10% increase. Profits were higher, thanks to better pricing and lower bad-debt expenses. Outpatient Rehabilitation wasn't as robust, showing a 3% rise in sales to $173 million and margins were squeezed. This division is feeling the effects of the slower economy more than the other. Expect continued solid improvement for at least another year. The Regency integration is going smoothly, putting better results to the bottom line sooner than expected. Higher prices are holding for both Specialty Hospital and Outpatient Rehab. To help earnings even more, the company is buying back its shares. On August 3, 2011, the board authorized an increase of $50 million to its existing $100 million program, boosting it to $150 million. It will remain in effect until March, 2013, unless it's extended by the board. For the first 9 months of this year, the company bought 4.65 million shares at a cost of $31.6 million. Since the beginning of the program, 11.555 million shares have been purchased at a cost of $75.8 million. The only red flag waving for SEM is healthcare reform. No one knows yet how it will affect providers, the regulations required, or the reimbursement schedules. Until those issues are clearly resolved, some investors will hold back on buying. (For more stock ideas, see www.theonlineinvestor.com)