Is Encompass Health (EHC) a Buy After Recent Volatility? A Value Investing Perspective

In the ever-evolving landscape of healthcare investing, Encompass Health (EHC) has emerged as a focal point for value investors seeking opportunities amid sector-specific challenges. Recent volatility in EHC's stock price, coupled with mixed signals on margins and growth, demands a nuanced analysis. This article evaluates whether EHC aligns with value investing principles, balancing deteriorating operational trends with robust growth tailwinds and disciplined financial management.

Financial Performance: Margin Expansion and Strategic Growth

Encompass Health's Q3 2025 earnings report underscored its ability to navigate industry headwinds through operational efficiency. Revenue grew by 9.4% year-on-year to $1.48 billion, driven by a 5.0% increase in discharges and a 3.3% rise in net patient revenue per discharge. Adjusted EBITDA surged 11.4% to $300.1 million, with operating margins expanding to 17.5% from 15.7% in the prior-year period according to the earnings release. This margin improvement, coupled with a net profit margin of 9.3% in 2025 (up from 8.3% in 2024), highlights the company's focus on cost optimization and high-margin inpatient rehabilitation services.

However, same-store discharge growth-a critical metric for assessing the sustainability of existing operations-slowed to 2.9% in Q3 2025, down from 6.8% in the prior-year period. This deceleration raises questions about the capacity of legacy facilities to maintain volume growth. Yet, EHC has offset this challenge through aggressive expansion, opening three new hospitals and adding 39 beds in Q3 alone. Such strategic investments have fueled overall revenue growth and positioned the company to capitalize on long-term demand for post-acute care.

Valuation Metrics: Premium Pricing Justified?

EHC's valuation multiples suggest a premium compared to industry peers, but this premium appears warranted given its financial discipline and market leadership. The company trades at a forward P/E ratio of 18–20x, higher than Select Medical Holdings (SEM)'s 13–15x range according to analyst reports. Similarly, EHC's EV/EBITDA multiple of 9–10x exceeds SEM's 8–9x according to valuation data, reflecting stronger profitability and a more conservative balance sheet.

The Price-to-Book (P/B) ratio further illustrates EHC's premium valuation. In Q3 2025, EHC's P/B stood at 5.39–5.43, significantly above the industry median of 2.52 and first quartile of 1.15. This premium underscores investor confidence in EHC's asset base and operational resilience. While some may view these multiples as elevated, they align with EHC's track record of margin expansion and disciplined capital allocation. Analysts project further net profit margin growth to 9.9% over the next three years, suggesting that the current valuation could be justified by future earnings power.

Growth Tailwinds and Strategic Positioning

EHC's expansion strategy is a key driver of its long-term value proposition. The company raised its full-year 2025 guidance, projecting net operating revenue of $5.93 billion (midpoint) and adjusted EBITDA of $1.25 billion. This optimism is rooted in its ability to scale operations through new facility openings and capacity additions. For value investors, EHC's focus on high-margin inpatient rehabilitation services-a segment with limited supply-side constraints-offers a durable competitive advantage.

Moreover, EHC's disciplined approach to debt management and capital returns enhances its appeal. The company's strong operating cash flow and elevated margins provide flexibility to reinvest in growth or reward shareholders, both of which are critical for sustaining long-term value.

Risks and Considerations

While EHC's fundamentals are compelling, investors must remain cautious. The slowdown in same-store discharge growth signals potential saturation in existing markets. Additionally, regulatory shifts or reimbursement pressures in the post-acute care sector could impact margins. However, EHC's proactive expansion and focus on high-margin services mitigate these risks to an extent.

Conclusion: A Buy for Value Investors?

Encompass Health presents a nuanced case for value investors. While its valuation multiples are elevated relative to peers, the company's margin expansion, disciplined balance sheet, and strategic growth initiatives justify the premium. The recent volatility, if driven by short-term concerns rather than structural issues, may represent an entry point for investors with a long-term horizon. For those prioritizing durable cash flows and operational resilience, EHC's combination of margin strength and expansionary momentum makes it a compelling buy.