Encompass Health Soars in Q1: Strong Revenue Growth Fuels Bullish Outlook

Encompass Health Corporation (NYSE: EHR) delivered a robust first-quarter 2025 performance, with revenue surging 10.6% year-over-year to $1.455 billion, significantly outpacing expectations. The healthcare provider, a leading operator of inpatient rehabilitation and acute care hospitals, not only met its operational targets but also raised its full-year 2025 guidance, signaling confidence in its growth trajectory. This article dissects the key drivers of Encompass Health’s success and evaluates its investment potential.

Financial Highlights: A Momentum-Fueled Quarter

Encompass Health’s Q1 results were marked by broad-based strength:
- Net operating revenue hit $1.455 billion, driven by a 6.3% increase in total discharges to 64,985 and a 3.9% rise in net patient revenue per discharge to $21,816.
- Adjusted EBITDA jumped 14.9% to $313.6 million, while adjusted free cash flow surged 32.7% to $222.4 million, reflecting strong cash conversion.
- EPS rose 33.3% to $1.48, with adjusted EPS increasing 22.3% to $1.37, outpacing the prior-year period.

The company’s ability to grow both volumes and pricing—amid a challenging healthcare cost environment—suggests effective execution of its strategy to expand market share in inpatient rehabilitation services. Management cited “improved pricing discipline” and operational efficiencies as key contributors.

Operational Excellence and Strategic Expansion

Encompass Health’s operational performance underscores its capacity to scale:
- The new 40-bed hospital in Athens, Georgia, and 25 additional beds in existing facilities bolstered capacity, supporting higher discharge numbers.
- Same-store discharges rose 4.4%, indicating organic demand growth in its core markets.
- A reduced revenue reserve for bad debt (down to 2.0% of revenue from 2.2%) signals better patient payment collections, a positive operational metric.

The company’s growth strategy remains ambitious: in 2025, it plans to open 7 de novo hospitals (340 beds), a 50-bed satellite hospital, and add 100–120 beds to existing facilities. These expansions, coupled with its 167-hospital network across 38 states and Puerto Rico, position Encompass Health to capitalize on rising demand for specialized acute care.

Updated Guidance: A Bullish Reassessment

Encompass Health raised its full-year 2025 guidance across key metrics:
- Net operating revenue: $5.85–5.925 billion (up from $5.80–5.90 billion).
- Adjusted EBITDA: $1.185–1.220 billion (vs. $1.16–1.20 billion prior).
- Adjusted EPS: $4.85–5.10 (from $4.67–4.96).

The upward revision reflects favorable Medicare pricing adjustments (3.3% in Q2/Q3 and 2.7% in Q4) and cost controls. Management also highlighted its focus on reducing wage inflation pressures, with salaries and benefits per full-time equivalent expected to grow only 3.25–3.75% in 2025.

Capital Allocation: Prioritizing Shareholders

Encompass Health continues to reward investors through dividends and buybacks:
- A $0.17 per share quarterly dividend (a 13% increase over 2024) was paid in Q1.
- The company repurchased $32.1 million in shares during the quarter, with $458 million remaining under its $500 million buyback program.

The net leverage ratio of 2.1x, well below its 3.5x target, leaves ample flexibility for further debt reduction or strategic acquisitions.

Risks and Considerations

While Encompass Health’s results are encouraging, challenges remain:
- Medicare reimbursement risks: A potential slowdown in pricing adjustments could pressure margins.
- Labor cost inflation: Though projected to moderate, rising wages remain a headwind.
- Regulatory scrutiny: Changes to healthcare policies or reimbursement models could disrupt growth.

Conclusion: A Compelling Investment Case

Encompass Health’s Q1 results and revised guidance paint a compelling picture of a company executing flawlessly in its niche. With a 10.6% revenue surge, 32.7% free cash flow growth, and a strengthened balance sheet, the business is primed for sustained expansion.

The adjusted EPS guidance of $4.85–5.10 represents a 4.2–8.8% increase from 2024’s $4.67, while its $620–715 million projected adjusted free cash flow underscores liquidity strength. The planned 340 new beds and geographic expansions further amplify its scale advantage.

Investors should note that Encompass Health’s 2.1x net leverage ratio and ample liquidity ($953 million available) provide a safety margin against macroeconomic headwinds. The dividend increase and active buyback program also align with shareholder-friendly policies.

In sum, Encompass Health’s Q1 earnings and strategic initiatives position it as a top-tier play in the rehabilitation and acute care sector. With solid fundamentals and a bullish outlook, the stock appears well-positioned to deliver gains for investors focused on healthcare’s resilient subsectors.