Select Medical Holdings Corporation (SEM Quick QuoteSEM - Free Report) is well-poised to grow on the back of partnerships with large healthcare systems and a string of strategic acquisitions. Its diversified business and rebounding patient visits bode well.

Select Medical — with a market cap of $3.3 billion — is a healthcare company with multiple long-term acute care and inpatient rehabilitation hospitals as well as occupational health and physical therapy clinics. SEM has operations in 46 states along with the District of Columbia.

Courtesy of solid prospects, this currently Zacks Rank #1 (Strong Buy) stock is worth adding to your portfolio at the moment.

Rising Estimates

The Zacks Consensus Estimate for Select Medical’s 2022 earnings is pegged at $2.19 per share, which has improved 1.4% in the past 60 days. During this time, SEM has witnessed one upward estimate revision against none in the opposite direction. The company beat on earnings in each of the last four quarters, the average being 42%.

The consensus estimate for 2022 revenuesstands at $6.5 billion, suggestinga 4.4% rise from the prior-year reported figure. In its latest earnings report, SEM reiterated its three-year (2021-2023) CAGR for revenues between 4% and 6%.

Key Drivers

Select Medical is well-positioned to benefit from rising demand for medical services owing to an aging population, which will drive growth across its business segments. Rebounding patient visits across the Outpatient Rehabilitation and Concentra segments are expected to boost its profit levels in the coming days. The Concentra business witnessed 11.5% year-over-year growth in patient visits, while Outpatient Rehabilitation recorded 10% growth, in the last reported quarter.

Strategic alliances are magnifying Select Medical’s growth potential while keeping the risk factor low. SEM creates joint ventures (JVs) with other companies to boost its footprint in different markets. It formed a JV partnership with Grandview Medical Center, named Champion Sports Medicine Birmingham, which will likely aid patients in Birmingham and nearby communities. SEM entered into a JV partnership with the subsidiary of Community Health Systems, Inc. (CYH Quick QuoteCYH - Free Report) , ShorePoint Health Venice.

Along with the Community Health’s arm, SEM will operate a combined critical illness recovery and inpatient rehabilitation hospital located in Venice, FL, where it will function as the majority owner and managing partner. Select Medical also created a JV with a not-for-profit health organization called Inova Health System for a 32-bed critical illness recovery facility in Northern Virginia. The JV is expected to own and operate the hospital, which will be located within the Inova Mount Vernon Hospital. The move comes at an opportune time as demand for specialty care is rising in Northern Virginia.

SEM’s valuation seems inexpensive at the current level. Looking at its 12-month forward price-to-earnings multiple, investors might want to pay further premiums. Select Medical currently has a ratio of 9.71X, lower than the industry average of 19.51X.

Select Medical’s consistent improvement in return on equity (ROE) is noteworthy. SEM’s trailing 12-month ROE of 24.7% is higher than the industry’s ROE of 22%, reflecting its tactical efficiency in utilizing its shareholders’ funds. SEM acquired 20.2% remaining outstanding membership interests of Concentra Group Holdings Parent to further increase profitability.

Select Medical’s strong shareholder value-boosting efforts are praiseworthy. SEM bought back shares of $51.7 million in the March quarter. The $1-billion share buyback program, which its board of directors had approved and under which additional shares worth $533 million can be repurchased, will run through the end of next year, if not extended further or concluded earlier.

Risks

However, there are a few factors that might impede the stock’s growth.

SEM’s high debt burden is concerning. Its total debt-to-total capital at the first-quarter-end was 73.4%, much higher than the industry’s average of 36.8%. At the first-quarter-end, Select Medical had cash and cash equivalents of only $130.9 million, which plunged 76.1% from the 2021-end level, while long-term debt, net of current portion, escalated 5.1% from the 2021-end level to $3.7 billion.

Also, increasing costs are eating into its profits. Its total costs and expenses in 2021 were $5.6 billion, up 11.5% from the year-ago period’s level. The metric escalated 8.5% year over year to $1.5 billion in the first quarter due to increased cost of services. Nevertheless, we believe that a systematic and strategic plan of action will drive its long-term growth.

Other Key Picks

Some other top-ranked stocks in the broader medical space are Assertio Holdings, Inc. (ASRT Quick QuoteASRT - Free Report) and Altimmune, Inc. (ALT Quick QuoteALT - Free Report) . While Assertio sports a Zacks Rank #1, Altimmune carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Assertio’s second-quarter earnings indicates a 125% improvement from the year-ago quarter’s reported figure. ASRT’s earnings beat estimates twice in the last four quarters and missed the same on the other two occasions, the average surprise being 26.4%.

The Zacks Consensus Estimate for Altimmune’s 2022 bottom line indicates an 8.2% improvement from the 2021 level. ALT has witnessed four upward estimate revisions in the past 60 days against none in the opposite direction. ALT’s earnings beat estimates in three of the last four quarters and missed the mark once on the remaining occasion.