Encompass Health trades at $120.32 per share and has stayed right on track with the overall market, gaining 16.5% over the last six months. At the same time, the S&P 500 has returned 21.1%.
Is now the time to buy Encompass Health, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Is Encompass Health Not Exciting?
We're sitting this one out for now. Here are two reasons you should be careful with EHC and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Encompass Health’s 4.3% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the healthcare sector.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Encompass Health’s margin dropped by 1 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it is in the middle of an investment cycle. Encompass Health’s free cash flow margin for the trailing 12 months was 13.9%.
Final Judgment
Encompass Health isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 22.2× forward P/E (or $120.32 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward one of our all-time favorite software stocks.
Stocks We Like More Than Encompass Health
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