Encompass Health currently trades at $103.99 per share and has shown little upside over the past six months, posting a small loss of 2.3%. The stock also fell short of the S&P 500’s 7.5% gain during that period.

Is there a buying opportunity in Encompass Health, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Encompass Health Not Exciting?

We’re sitting this one out for now. Here are three reasons you should be careful with EHC, plus one stock we’d rather own.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Encompass Health’s sales grew at a mediocre 6.5% compounded annual growth rate over the last five years. This was below our standard for the healthcare sector.

2. Same-Store Sales Falling Behind Peers

Investors interested in Outpatient & Specialty Care companies should track same-store sales in addition to reported revenue. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Encompass Health’s underlying demand characteristics.

Over the last two years, Encompass Health’s same-store sales averaged 4.3% year-on-year growth. This performance slightly lagged the sector and suggests it might have to change its strategy or pricing, which can disrupt operations.

3. Adjusted Operating Margin in Limbo

Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.

Looking at the trend in its profitability, Encompass Health’s adjusted operating margin might have fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 17.6%.

Final Judgment

Encompass Health isn’t a terrible business, but it doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 16.5× forward P/E (or $103.99 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re pretty confident there are superior stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Would Buy Instead of Encompass Health

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