UBS cuts Select Medical stock target to $15 on regulatory challenges

On Monday, UBS analyst AJ Rice revised the price target for Select Medical (TASE:BLWV) Holdings (NYSE:SEM) stock, reducing it to $15.00 from the previous $19.00, while maintaining a Neutral rating. The stock, which has fallen over 21% in the past week and is trading near its 52-week low, appears undervalued according to InvestingPro analysis. Analyst targets currently range from $15 to $25, suggesting potential upside despite recent challenges. The adjustment follows Select Medical’s report of weaker than expected results in its Long-Term Acute Care Hospital (LTACH) segment for the first quarter. The company attributed the shortfall primarily to regulatory changes, including a significant rise in the high-cost outlier threshold and the implementation of the 20% transmittal rule. Despite these challenges, InvestingPro data shows the company maintains strong fundamentals with a ’GOOD’ overall financial health score and revenue growth of 16.4% over the last twelve months. (Discover 6 more exclusive InvestingPro Tips for SEM)

Select Medical observed that these regulatory shifts posed particular difficulties due to their focus on treating highly acute patients, especially during respiratory season. Despite the initial challenges, the company indicated that LTACH performance improved toward the end of the quarter, a trend that has continued into the second quarter. Furthermore, Select Medical expects the impact of the higher outlier threshold to lessen as the year progresses since the first quarter usually experiences the most pronounced effects. According to InvestingPro analysis, the company is expected to remain profitable this year, with analysts forecasting EPS of $1.09 for FY2025.

The company is actively engaging with the Centers for Medicare & Medicaid Services (CMS) and lawmakers to address the severe consequences of the increased high-cost outlier threshold. Select Medical’s efforts are aimed at mitigating the impact of these regulatory changes on their operations.

Select Medical’s first-quarter challenges were compounded by a delayed onset of the flu season, which typically contributes to higher patient volumes. Despite these setbacks, the company remains proactive in its discussions with regulatory bodies and is optimistic about the potential for improvement in the coming months. The company maintains a solid current ratio of 1.16 and has generated significant free cash flow over the past year, supporting its financial stability during this transitional period.

In other recent news, Select Medical Holdings Corporation reported its first-quarter earnings for 2025, surpassing analysts’ expectations with an earnings per share (EPS) of $0.75, more than double the forecasted $0.37. However, the company’s revenue fell short of expectations, totaling $1.35 billion against a projected $1.39 billion. Despite the earnings beat, Select Medical’s stock experienced a decline following the announcement. The company has revised its 2025 guidance, projecting revenue between $5.3 billion and $5.5 billion. Analysts at Benchmark and Mizuho (NYSE:MFG) have both adjusted their price targets for Select Medical to $21, with Benchmark maintaining a Buy rating and Mizuho an Outperform rating. The adjustments come after a 2% decrease in the company’s adjusted EBITDA guidance for 2025, attributed to challenges in the Critical Illness Recovery Hospitals segment. Despite these challenges, analysts remain optimistic about the company’s inpatient rehabilitation segment, which showed strong growth with a 16% revenue increase. Both Benchmark and Mizuho suggest that the market reaction to the company’s revised forecasts may have been exaggerated.

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