What a brutal six months it’s been for Select Medical. The stock has dropped 26.7% and now trades at $12.40, rattling many shareholders. This may have investors wondering how to approach the situation.
Is now the time to buy Select Medical, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Select Medical Will Underperform?
Even though the stock has become cheaper, we're cautious about Select Medical. Here are three reasons we avoid SEM and a stock we'd rather own.
1. Demand Slips as Sales Volumes Slide
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Outpatient & Specialty Care company because there’s a ceiling to what customers will pay.
Select Medical’s admissions came in at 8,966 in the latest quarter, and they averaged 1.4% year-on-year declines over the last two years. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Select Medical might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Select Medical’s revenue to drop by 4.5%, a decrease from its 1.3% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will see some demand headwinds.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Select Medical, its EPS declined by 3.4% annually over the last five years while its revenue grew by 1.3%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Select Medical falls short of our quality standards. Following the recent decline, the stock trades at 10.5× forward P/E (or $12.40 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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