Shares of Select Medical Holdings Corporation SEM have plunged 48.2% in the past six months, underperforming the industry’s decline of 1.9%. Peers like Centene Corporation CNC and The Cigna Group CI have lost 9.4% and 15.7%, respectively, over the same time frame.

In contrast, the S&P 500 index has returned 6.4% over the same period, highlighting a divergence in performance. The stock is down 14.9% at this point from its 52-week high of $22.08. The stock is currently trading below its 50-day moving average, signaling potential downward momentum.

SEM 6-Month Price Performance Comparison

Image Source: Zacks Investment Research

Given this performance so far, can investors still consider holding on to Select Medical stock, or should steer clear of this stock? Let’s delve deeper.

What’s Weighing on SEM Stock?

Select Medical's profitability has been adversely affected by escalating costs and expenses, which increased 11.5%, 5.8% and 2.5% in 2021, 2022 and 2023, respectively. In the first nine months of 2024, costs rose an additional 5.6%, driven by higher service expenses. For the full year, overall costs are projected to increase more than 5% year over year, which is expected to exert pressure on profit margins.

The company pursues growth through acquisitions to enhance volumes, but its return on invested capital is 6.2%, falling short of the industry average of 10.4%, suggesting less effective capital utilization.

Additionally, Select Medical grapples with significant leverage that could constrain its ability to execute an inorganic growth strategy. Its net debt-to-capital ratio is a high 55.2% compared to the industry average of 20.6%. As of Sept. 30, 2024, the company reported $3.1 billion in long-term debt (excluding current portions) and cash and cash equivalents of only $191.5 million.

SEM completed the spin-off of Concentra in November 2024. This strategic move streamlines SEM’s operations and enables the company to focus on its core business areas, such as critical illness recovery hospitals, rehabilitation hospitals and outpatient rehabilitation clinics. While the spin-off and other strategic initiatives may position Select Medical for future growth, rising expenses and significant leverage suggest caution.

SEM’s Valuation

The company is currently trading at 9.57X forward 12-month earnings, below its five-year median of 12.90X and the industry average of 14.34X. This indicates the stock may be undervalued, possibly signaling cautious investor sentiment or concerns about its short-term outlook.

Image Source: Zacks Investment Research

SEM’s peers like Centene and Cigna are valued at 8.88X and 9.62X forward 12-month earnings, respectively.

SEM’s Earnings Estimates Moving Down

Reflecting the negative sentiment around Select Medical now, the Zacks Consensus Estimate for earnings per share has seen downward revisions. The consensus estimate for current-quarter adjusted earnings for SEM is currently pegged at 15 cents per share, indicating a 58.3% year-over-year decline. The consensus mark for next quarter’s earnings suggests a further 46.8% fall.

Image Source: Zacks Investment Research

Conclusion

Rising costs and significant leverage are straining SEM’s financial health. Despite a low valuation and strategic moves like the Concentra spin-off, downward earnings revisions and underperformance compared to peers and the market signal continued struggles. Given these factors, SEM's risks outweigh its potential.

Given its Zacks Rank #5 (Strong Sell), the stock appears to be a risky investment at present, investors should get rid of.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Cigna Group (CI) : Free Stock Analysis Report

Centene Corporation (CNC) : Free Stock Analysis Report

Select Medical Holdings Corporation (SEM) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research