Intrinsic value of HealthSouth - HLS

Previous Close

$49.41

  Intrinsic Value

$57.96

stock screener

  Rating & Target

hold

+17%

Previous close

$49.41

 
Intrinsic value

$57.96

 
Up/down potential

+17%

 
Rating

hold

We calculate the intrinsic value of HLS stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  17.01
  7.80
  7.52
  7.27
  7.04
  6.84
  6.65
  6.49
  6.34
  6.21
  6.08
  5.98
  5.88
  5.79
  5.71
  5.64
  5.58
  5.52
  5.47
  5.42
  5.38
  5.34
  5.31
  5.28
  5.25
  5.22
  5.20
  5.18
  5.16
  5.15
  5.13
Revenue, $m
  3,646
  3,930
  4,226
  4,533
  4,852
  5,184
  5,529
  5,888
  6,261
  6,649
  7,054
  7,476
  7,915
  8,373
  8,852
  9,351
  9,872
  10,417
  10,987
  11,582
  12,205
  12,857
  13,539
  14,254
  15,002
  15,785
  16,606
  17,466
  18,368
  19,314
  20,305
Variable operating expenses, $m
 
  3,055
  3,270
  3,493
  3,726
  3,967
  4,219
  4,480
  4,752
  5,034
  5,329
  5,443
  5,763
  6,097
  6,445
  6,809
  7,189
  7,585
  8,000
  8,434
  8,887
  9,362
  9,859
  10,379
  10,923
  11,494
  12,092
  12,718
  13,375
  14,063
  14,785
Fixed operating expenses, $m
 
  165
  169
  173
  178
  182
  187
  191
  196
  201
  206
  211
  217
  222
  227
  233
  239
  245
  251
  257
  264
  270
  277
  284
  291
  298
  306
  314
  321
  329
  338
Total operating expenses, $m
  3,005
  3,220
  3,439
  3,666
  3,904
  4,149
  4,406
  4,671
  4,948
  5,235
  5,535
  5,654
  5,980
  6,319
  6,672
  7,042
  7,428
  7,830
  8,251
  8,691
  9,151
  9,632
  10,136
  10,663
  11,214
  11,792
  12,398
  13,032
  13,696
  14,392
  15,123
Operating income, $m
  641
  711
  787
  866
  949
  1,034
  1,124
  1,216
  1,313
  1,414
  1,519
  1,821
  1,935
  2,054
  2,179
  2,309
  2,445
  2,587
  2,736
  2,891
  3,054
  3,225
  3,403
  3,591
  3,787
  3,993
  4,208
  4,435
  4,672
  4,921
  5,182
EBITDA, $m
  814
  993
  1,076
  1,162
  1,252
  1,345
  1,443
  1,544
  1,649
  1,758
  1,873
  1,992
  2,116
  2,246
  2,381
  2,522
  2,670
  2,825
  2,986
  3,156
  3,333
  3,518
  3,713
  3,916
  4,129
  4,353
  4,588
  4,833
  5,091
  5,362
  5,646
Interest expense (income), $m
  164
  158
  174
  191
  208
  226
  245
  265
  285
  306
  328
  351
  375
  400
  426
  453
  482
  511
  542
  574
  608
  644
  681
  719
  760
  802
  847
  894
  942
  994
  1,047
Earnings before tax, $m
  482
  553
  613
  676
  741
  808
  879
  952
  1,028
  1,108
  1,191
  1,470
  1,560
  1,654
  1,753
  1,856
  1,963
  2,076
  2,194
  2,317
  2,446
  2,581
  2,723
  2,871
  3,027
  3,190
  3,362
  3,541
  3,730
  3,927
  4,135
Tax expense, $m
  164
  149
  166
  182
  200
  218
  237
  257
  278
  299
  321
  397
  421
  447
  473
  501
  530
  560
  592
  626
  660
  697
  735
  775
  817
  861
  908
  956
  1,007
  1,060
  1,116
Net income, $m
  248
  404
  448
  493
  541
  590
  641
  695
  751
  809
  869
  1,073
  1,139
  1,208
  1,279
  1,355
  1,433
  1,515
  1,601
  1,691
  1,785
  1,884
  1,988
  2,096
  2,210
  2,329
  2,454
  2,585
  2,723
  2,867
  3,018

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  41
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  4,682
  5,000
  5,377
  5,767
  6,173
  6,595
  7,034
  7,491
  7,966
  8,460
  8,975
  9,511
  10,070
  10,653
  11,262
  11,897
  12,560
  13,253
  13,978
  14,736
  15,528
  16,357
  17,225
  18,134
  19,086
  20,083
  21,127
  22,222
  23,369
  24,572
  25,833
Adjusted assets (=assets-cash), $m
  4,641
  5,000
  5,377
  5,767
  6,173
  6,595
  7,034
  7,491
  7,966
  8,460
  8,975
  9,511
  10,070
  10,653
  11,262
  11,897
  12,560
  13,253
  13,978
  14,736
  15,528
  16,357
  17,225
  18,134
  19,086
  20,083
  21,127
  22,222
  23,369
  24,572
  25,833
Revenue / Adjusted assets
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
  0.786
Average production assets, $m
  1,766
  1,902
  2,045
  2,194
  2,349
  2,509
  2,676
  2,850
  3,030
  3,218
  3,414
  3,618
  3,831
  4,053
  4,284
  4,526
  4,778
  5,042
  5,318
  5,606
  5,907
  6,223
  6,553
  6,899
  7,261
  7,640
  8,037
  8,454
  8,890
  9,348
  9,827
Working capital, $m
  179
  189
  203
  218
  233
  249
  265
  283
  301
  319
  339
  359
  380
  402
  425
  449
  474
  500
  527
  556
  586
  617
  650
  684
  720
  758
  797
  838
  882
  927
  975
Total debt, $m
  3,016
  3,280
  3,597
  3,926
  4,268
  4,623
  4,993
  5,377
  5,777
  6,193
  6,627
  7,078
  7,549
  8,040
  8,552
  9,087
  9,646
  10,229
  10,840
  11,477
  12,145
  12,843
  13,574
  14,339
  15,140
  15,980
  16,859
  17,781
  18,747
  19,760
  20,821
Total liabilities, $m
  3,946
  4,210
  4,527
  4,856
  5,198
  5,553
  5,923
  6,307
  6,707
  7,123
  7,557
  8,008
  8,479
  8,970
  9,482
  10,017
  10,576
  11,159
  11,770
  12,407
  13,075
  13,773
  14,504
  15,269
  16,070
  16,910
  17,789
  18,711
  19,677
  20,690
  21,751
Total equity, $m
  736
  790
  849
  911
  975
  1,042
  1,111
  1,184
  1,259
  1,337
  1,418
  1,503
  1,591
  1,683
  1,779
  1,880
  1,985
  2,094
  2,209
  2,328
  2,453
  2,584
  2,722
  2,865
  3,016
  3,173
  3,338
  3,511
  3,692
  3,882
  4,082
Total liabilities and equity, $m
  4,682
  5,000
  5,376
  5,767
  6,173
  6,595
  7,034
  7,491
  7,966
  8,460
  8,975
  9,511
  10,070
  10,653
  11,261
  11,897
  12,561
  13,253
  13,979
  14,735
  15,528
  16,357
  17,226
  18,134
  19,086
  20,083
  21,127
  22,222
  23,369
  24,572
  25,833
Debt-to-equity ratio
  4.098
  4.150
  4.230
  4.310
  4.380
  4.440
  4.490
  4.540
  4.590
  4.630
  4.670
  4.710
  4.740
  4.780
  4.810
  4.830
  4.860
  4.880
  4.910
  4.930
  4.950
  4.970
  4.990
  5.000
  5.020
  5.040
  5.050
  5.060
  5.080
  5.090
  5.100
Adjusted equity ratio
  0.150
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158
  0.158

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  248
  404
  448
  493
  541
  590
  641
  695
  751
  809
  869
  1,073
  1,139
  1,208
  1,279
  1,355
  1,433
  1,515
  1,601
  1,691
  1,785
  1,884
  1,988
  2,096
  2,210
  2,329
  2,454
  2,585
  2,723
  2,867
  3,018
Depreciation, amort., depletion, $m
  173
  282
  289
  296
  303
  311
  319
  327
  336
  345
  354
  171
  181
  191
  202
  213
  225
  238
  251
  264
  279
  294
  309
  325
  342
  360
  379
  399
  419
  441
  464
Funds from operations, $m
  480
  686
  737
  789
  844
  901
  960
  1,022
  1,086
  1,153
  1,223
  1,244
  1,320
  1,399
  1,482
  1,568
  1,659
  1,753
  1,852
  1,956
  2,064
  2,178
  2,297
  2,421
  2,552
  2,689
  2,833
  2,984
  3,142
  3,308
  3,482
Change in working capital, $m
  -126
  14
  14
  15
  15
  16
  17
  17
  18
  19
  19
  20
  21
  22
  23
  24
  25
  26
  27
  29
  30
  31
  33
  34
  36
  38
  39
  41
  43
  45
  48
Cash from operations, $m
  606
  672
  723
  775
  829
  885
  944
  1,005
  1,068
  1,134
  1,203
  1,223
  1,298
  1,377
  1,459
  1,544
  1,634
  1,727
  1,825
  1,927
  2,034
  2,146
  2,264
  2,387
  2,516
  2,652
  2,794
  2,943
  3,099
  3,263
  3,434
Maintenance CAPEX, $m
  0
  -83
  -90
  -96
  -103
  -111
  -118
  -126
  -134
  -143
  -152
  -161
  -171
  -181
  -191
  -202
  -213
  -225
  -238
  -251
  -264
  -279
  -294
  -309
  -325
  -342
  -360
  -379
  -399
  -419
  -441
New CAPEX, $m
  -203
  -136
  -143
  -149
  -154
  -161
  -167
  -174
  -181
  -188
  -196
  -204
  -213
  -222
  -231
  -242
  -252
  -264
  -276
  -288
  -301
  -315
  -330
  -346
  -362
  -379
  -397
  -416
  -436
  -458
  -480
Cash from investing activities, $m
  -245
  -219
  -233
  -245
  -257
  -272
  -285
  -300
  -315
  -331
  -348
  -365
  -384
  -403
  -422
  -444
  -465
  -489
  -514
  -539
  -565
  -594
  -624
  -655
  -687
  -721
  -757
  -795
  -835
  -877
  -921
Free cash flow, $m
  361
  453
  490
  530
  571
  614
  658
  705
  753
  804
  856
  858
  915
  974
  1,036
  1,100
  1,168
  1,238
  1,311
  1,388
  1,468
  1,552
  1,640
  1,732
  1,829
  1,930
  2,036
  2,147
  2,263
  2,386
  2,514
Issuance/(repayment) of debt, $m
  -193
  301
  317
  329
  342
  355
  369
  384
  400
  416
  433
  452
  471
  491
  512
  535
  559
  584
  610
  638
  667
  698
  731
  765
  801
  839
  879
  922
  966
  1,013
  1,062
Issuance/(repurchase) of shares, $m
  -66
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -298
  301
  317
  329
  342
  355
  369
  384
  400
  416
  433
  452
  471
  491
  512
  535
  559
  584
  610
  638
  667
  698
  731
  765
  801
  839
  879
  922
  966
  1,013
  1,062
Total cash flow (excl. dividends), $m
  63
  754
  806
  859
  913
  969
  1,028
  1,089
  1,153
  1,220
  1,289
  1,310
  1,386
  1,465
  1,548
  1,635
  1,726
  1,822
  1,921
  2,026
  2,136
  2,251
  2,371
  2,498
  2,630
  2,769
  2,915
  3,069
  3,229
  3,398
  3,576
Retained Cash Flow (-), $m
  -125
  -58
  -59
  -62
  -64
  -67
  -69
  -72
  -75
  -78
  -81
  -85
  -88
  -92
  -96
  -100
  -105
  -110
  -114
  -120
  -125
  -131
  -137
  -144
  -150
  -158
  -165
  -173
  -181
  -190
  -199
Prev. year cash balance distribution, $m
 
  4
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  700
  747
  797
  849
  902
  959
  1,017
  1,078
  1,142
  1,208
  1,225
  1,298
  1,373
  1,452
  1,535
  1,621
  1,712
  1,807
  1,906
  2,010
  2,120
  2,234
  2,354
  2,480
  2,612
  2,750
  2,896
  3,048
  3,208
  3,376
Discount rate, %
 
  10.30
  10.82
  11.36
  11.92
  12.52
  13.15
  13.80
  14.49
  15.22
  15.98
  16.78
  17.62
  18.50
  19.42
  20.39
  21.41
  22.48
  23.61
  24.79
  26.03
  27.33
  28.70
  30.13
  31.64
  33.22
  34.88
  36.62
  38.45
  40.38
  42.40
PV of cash for distribution, $m
 
  635
  608
  577
  541
  500
  457
  411
  365
  319
  274
  222
  185
  151
  121
  95
  73
  54
  40
  28
  20
  13
  9
  6
  3
  2
  1
  1
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

HealthSouth Corporation (HealthSouth) is a provider of post-acute healthcare services, offering both facility-based and home-based post-acute services in 35 states and Puerto Rico through its network of inpatient rehabilitation hospitals, home health agencies and hospice agencies. The Company manages its operations through segments, including inpatient rehabilitation, and home health and hospice. It is an owner and operator of inpatient rehabilitation hospitals. It provides specialized rehabilitative treatment on both an inpatient and outpatient basis. It offers its home health and hospice services through Encompass Home Health and Hospice business (Encompass). Encompass operates home health and hospice agencies in 25 states, with concentrations in the Southeast, Oklahoma, and Texas. As of December 31, 2016, the Company operated 123 inpatient rehabilitation hospitals. As of December 31, 2016, the Company managed five inpatient rehabilitation units through management contracts.

FINANCIAL RATIOS  of  HealthSouth (HLS)

Valuation Ratios
P/E Ratio 17.7
Price to Sales 1.2
Price to Book 6
Price to Tangible Book
Price to Cash Flow 7.3
Price to Free Cash Flow 10.9
Growth Rates
Sales Growth Rate 17%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 29.3%
Cap. Spend. - 3 Yr. Gr. Rate -1.3%
Financial Strength
Quick Ratio 1
Current Ratio 0.1
LT Debt to Equity 404.8%
Total Debt to Equity 409.8%
Interest Coverage 4
Management Effectiveness
Return On Assets 7.7%
Ret/ On Assets - 3 Yr. Avg. 8%
Return On Total Capital 6.6%
Ret/ On T. Cap. - 3 Yr. Avg. 7.3%
Return On Equity 36.8%
Return On Equity - 3 Yr. Avg. 37.4%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 96.2%
Gross Margin - 3 Yr. Avg. 95.8%
EBITDA Margin 22.5%
EBITDA Margin - 3 Yr. Avg. 22.9%
Operating Margin 17.6%
Oper. Margin - 3 Yr. Avg. 17.9%
Pre-Tax Margin 13.2%
Pre-Tax Margin - 3 Yr. Avg. 14.1%
Net Profit Margin 6.8%
Net Profit Margin - 3 Yr. Avg. 7.3%
Effective Tax Rate 34%
Eff/ Tax Rate - 3 Yr. Avg. 32.9%
Payout Ratio 33.9%

HLS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the HLS stock intrinsic value calculation we used $3646 million for the last fiscal year's total revenue generated by HealthSouth. The default revenue input number comes from 2016 income statement of HealthSouth. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our HLS stock valuation model: a) initial revenue growth rate of 7.8% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 10.3%, whose default value for HLS is calculated based on our internal credit rating of HealthSouth, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of HealthSouth.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of HLS stock the variable cost ratio is equal to 78.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $161 million in the base year in the intrinsic value calculation for HLS stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.3% for HealthSouth.

Corporate tax rate of 27% is the nominal tax rate for HealthSouth. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the HLS stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for HLS are equal to 48.4%.

Life of production assets of 21.2 years is the average useful life of capital assets used in HealthSouth operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for HLS is equal to 4.8%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $736 million for HealthSouth - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 98.563 million for HealthSouth is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of HealthSouth at the current share price and the inputted number of shares is $4.9 billion.

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Financial statements of HLS
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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