Intrinsic value of Select Medical Holdings - SEM

Previous Close

$17.35

  Intrinsic Value

$26.77

stock screener

  Rating & Target

str. buy

+54%

Previous close

$17.35

 
Intrinsic value

$26.77

 
Up/down potential

+54%

 
Rating

str. buy

We calculate the intrinsic value of SEM 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, %
  14.51
  4.10
  4.19
  4.27
  4.34
  4.41
  4.47
  4.52
  4.57
  4.61
  4.65
  4.69
  4.72
  4.75
  4.77
  4.79
  4.81
  4.83
  4.85
  4.86
  4.88
  4.89
  4.90
  4.91
  4.92
  4.93
  4.94
  4.94
  4.95
  4.95
  4.96
Revenue, $m
  4,286
  4,462
  4,649
  4,847
  5,058
  5,281
  5,517
  5,766
  6,030
  6,308
  6,601
  6,911
  7,237
  7,580
  7,942
  8,322
  8,723
  9,145
  9,588
  10,055
  10,545
  11,061
  11,603
  12,173
  12,772
  13,401
  14,063
  14,758
  15,488
  16,255
  17,061
Variable operating expenses, $m
 
  4,125
  4,286
  4,457
  4,639
  4,831
  5,035
  5,250
  5,478
  5,718
  5,971
  5,963
  6,244
  6,540
  6,852
  7,181
  7,526
  7,890
  8,273
  8,675
  9,099
  9,544
  10,011
  10,503
  11,020
  11,563
  12,134
  12,733
  13,363
  14,025
  14,720
Fixed operating expenses, $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
Total operating expenses, $m
  3,998
  4,125
  4,286
  4,457
  4,639
  4,831
  5,035
  5,250
  5,478
  5,718
  5,971
  5,963
  6,244
  6,540
  6,852
  7,181
  7,526
  7,890
  8,273
  8,675
  9,099
  9,544
  10,011
  10,503
  11,020
  11,563
  12,134
  12,733
  13,363
  14,025
  14,720
Operating income, $m
  288
  337
  363
  390
  419
  449
  482
  516
  552
  590
  630
  948
  993
  1,040
  1,089
  1,142
  1,197
  1,255
  1,315
  1,379
  1,447
  1,517
  1,592
  1,670
  1,752
  1,838
  1,929
  2,025
  2,125
  2,230
  2,341
EBITDA, $m
  433
  630
  656
  684
  714
  745
  778
  814
  851
  890
  931
  975
  1,021
  1,069
  1,121
  1,174
  1,231
  1,290
  1,353
  1,419
  1,488
  1,561
  1,637
  1,718
  1,802
  1,891
  1,984
  2,082
  2,185
  2,293
  2,407
Interest expense (income), $m
  143
  150
  160
  169
  180
  191
  203
  215
  229
  243
  257
  273
  289
  306
  325
  344
  364
  385
  407
  431
  455
  481
  509
  537
  568
  599
  633
  668
  704
  743
  784
Earnings before tax, $m
  181
  187
  203
  220
  239
  258
  279
  301
  324
  348
  373
  675
  704
  734
  765
  798
  833
  870
  908
  949
  991
  1,036
  1,083
  1,133
  1,185
  1,239
  1,297
  1,357
  1,420
  1,487
  1,557
Tax expense, $m
  56
  50
  55
  60
  64
  70
  75
  81
  87
  94
  101
  182
  190
  198
  207
  215
  225
  235
  245
  256
  268
  280
  292
  306
  320
  335
  350
  366
  384
  401
  420
Net income, $m
  115
  136
  148
  161
  174
  189
  204
  219
  236
  254
  272
  493
  514
  535
  558
  583
  608
  635
  663
  692
  724
  756
  791
  827
  865
  905
  947
  991
  1,037
  1,085
  1,137

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  99
  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
  4,921
  5,019
  5,229
  5,452
  5,689
  5,940
  6,206
  6,486
  6,783
  7,095
  7,425
  7,773
  8,140
  8,526
  8,933
  9,362
  9,812
  10,287
  10,785
  11,310
  11,862
  12,442
  13,052
  13,693
  14,367
  15,075
  15,819
  16,600
  17,422
  18,285
  19,191
Adjusted assets (=assets-cash), $m
  4,822
  5,019
  5,229
  5,452
  5,689
  5,940
  6,206
  6,486
  6,783
  7,095
  7,425
  7,773
  8,140
  8,526
  8,933
  9,362
  9,812
  10,287
  10,785
  11,310
  11,862
  12,442
  13,052
  13,693
  14,367
  15,075
  15,819
  16,600
  17,422
  18,285
  19,191
Revenue / Adjusted assets
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
  0.889
Average production assets, $m
  330
  344
  358
  373
  389
  407
  425
  444
  464
  486
  508
  532
  557
  584
  612
  641
  672
  704
  738
  774
  812
  852
  893
  937
  983
  1,032
  1,083
  1,136
  1,193
  1,252
  1,314
Working capital, $m
  191
  152
  158
  165
  172
  180
  188
  196
  205
  214
  224
  235
  246
  258
  270
  283
  297
  311
  326
  342
  359
  376
  395
  414
  434
  456
  478
  502
  527
  553
  580
Total debt, $m
  2,738
  2,849
  3,025
  3,213
  3,412
  3,623
  3,846
  4,081
  4,330
  4,593
  4,870
  5,163
  5,471
  5,795
  6,137
  6,497
  6,875
  7,274
  7,693
  8,134
  8,597
  9,084
  9,597
  10,135
  10,701
  11,296
  11,921
  12,577
  13,267
  13,992
  14,753
Total liabilities, $m
  4,105
  4,216
  4,392
  4,580
  4,779
  4,990
  5,213
  5,448
  5,697
  5,960
  6,237
  6,530
  6,838
  7,162
  7,504
  7,864
  8,242
  8,641
  9,060
  9,501
  9,964
  10,451
  10,964
  11,502
  12,068
  12,663
  13,288
  13,944
  14,634
  15,359
  16,120
Total equity, $m
  816
  803
  837
  872
  910
  950
  993
  1,038
  1,085
  1,135
  1,188
  1,244
  1,302
  1,364
  1,429
  1,498
  1,570
  1,646
  1,726
  1,810
  1,898
  1,991
  2,088
  2,191
  2,299
  2,412
  2,531
  2,656
  2,787
  2,926
  3,071
Total liabilities and equity, $m
  4,921
  5,019
  5,229
  5,452
  5,689
  5,940
  6,206
  6,486
  6,782
  7,095
  7,425
  7,774
  8,140
  8,526
  8,933
  9,362
  9,812
  10,287
  10,786
  11,311
  11,862
  12,442
  13,052
  13,693
  14,367
  15,075
  15,819
  16,600
  17,421
  18,285
  19,191
Debt-to-equity ratio
  3.355
  3.550
  3.620
  3.680
  3.750
  3.810
  3.870
  3.930
  3.990
  4.050
  4.100
  4.150
  4.200
  4.250
  4.290
  4.340
  4.380
  4.420
  4.460
  4.490
  4.530
  4.560
  4.600
  4.630
  4.660
  4.680
  4.710
  4.740
  4.760
  4.780
  4.800
Adjusted equity ratio
  0.157
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160
  0.160

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  115
  136
  148
  161
  174
  189
  204
  219
  236
  254
  272
  493
  514
  535
  558
  583
  608
  635
  663
  692
  724
  756
  791
  827
  865
  905
  947
  991
  1,037
  1,085
  1,137
Depreciation, amort., depletion, $m
  145
  293
  293
  294
  295
  296
  297
  298
  299
  300
  301
  27
  28
  30
  31
  33
  34
  36
  37
  39
  41
  43
  45
  48
  50
  52
  55
  58
  61
  64
  67
Funds from operations, $m
  365
  429
  442
  455
  469
  484
  500
  517
  535
  554
  573
  520
  542
  565
  589
  615
  642
  670
  700
  732
  765
  799
  836
  874
  915
  957
  1,002
  1,048
  1,097
  1,149
  1,203
Change in working capital, $m
  18
  6
  6
  7
  7
  8
  8
  8
  9
  9
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  17
  18
  18
  19
  20
  21
  22
  24
  25
  26
  27
Cash from operations, $m
  347
  423
  435
  448
  462
  477
  492
  509
  526
  544
  563
  509
  531
  553
  577
  602
  628
  656
  685
  716
  748
  782
  818
  855
  894
  936
  979
  1,025
  1,073
  1,123
  1,176
Maintenance CAPEX, $m
  0
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -30
  -31
  -33
  -34
  -36
  -37
  -39
  -41
  -43
  -45
  -48
  -50
  -52
  -55
  -58
  -61
  -64
New CAPEX, $m
  -162
  -14
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -23
  -24
  -25
  -26
  -28
  -29
  -31
  -32
  -34
  -36
  -38
  -40
  -42
  -44
  -46
  -48
  -51
  -54
  -56
  -59
  -62
Cash from investing activities, $m
  -554
  -31
  -31
  -33
  -35
  -37
  -39
  -41
  -43
  -45
  -48
  -50
  -52
  -54
  -58
  -60
  -64
  -66
  -70
  -73
  -77
  -81
  -85
  -89
  -94
  -98
  -103
  -109
  -114
  -120
  -126
Free cash flow, $m
  -207
  392
  403
  415
  427
  440
  453
  468
  483
  499
  516
  460
  479
  499
  520
  542
  565
  590
  615
  643
  671
  701
  733
  766
  801
  837
  876
  916
  959
  1,003
  1,050
Issuance/(repayment) of debt, $m
  294
  164
  177
  188
  199
  211
  223
  236
  249
  263
  277
  292
  308
  325
  342
  360
  379
  398
  419
  441
  463
  487
  512
  538
  566
  595
  625
  657
  690
  725
  761
Issuance/(repurchase) of shares, $m
  -1
  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  
  292
  164
  177
  188
  199
  211
  223
  236
  249
  263
  277
  292
  308
  325
  342
  360
  379
  398
  419
  441
  463
  487
  512
  538
  566
  595
  625
  657
  690
  725
  761
Total cash flow (excl. dividends), $m
  85
  556
  580
  602
  626
  650
  676
  704
  732
  762
  793
  752
  787
  823
  861
  902
  944
  988
  1,034
  1,083
  1,135
  1,188
  1,245
  1,304
  1,367
  1,432
  1,501
  1,573
  1,649
  1,728
  1,812
Retained Cash Flow (-), $m
  43
  -33
  -34
  -36
  -38
  -40
  -42
  -45
  -47
  -50
  -53
  -56
  -59
  -62
  -65
  -69
  -72
  -76
  -80
  -84
  -88
  -93
  -98
  -103
  -108
  -113
  -119
  -125
  -131
  -138
  -145
Prev. year cash balance distribution, $m
 
  46
  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
 
  569
  546
  567
  588
  610
  634
  659
  685
  712
  741
  696
  728
  761
  796
  833
  872
  912
  955
  999
  1,046
  1,096
  1,147
  1,202
  1,259
  1,319
  1,382
  1,448
  1,517
  1,590
  1,667
Discount rate, %
 
  11.10
  11.66
  12.24
  12.85
  13.49
  14.17
  14.88
  15.62
  16.40
  17.22
  18.08
  18.98
  19.93
  20.93
  21.98
  23.08
  24.23
  25.44
  26.71
  28.05
  29.45
  30.92
  32.47
  34.09
  35.80
  37.59
  39.47
  41.44
  43.51
  45.69
PV of cash for distribution, $m
 
  512
  438
  401
  363
  324
  286
  249
  214
  181
  151
  112
  90
  72
  56
  42
  31
  23
  16
  11
  7
  5
  3
  2
  1
  1
  0
  0
  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

Select Medical Holdings Corporation is an operator of specialty hospitals, outpatient rehabilitation clinics and occupational medicine centers in the United States. The Company's segments include specialty hospitals, outpatient rehabilitation, Concentra and Other. The specialty hospitals segment consists of hospitals designed to serve the needs of long term acute patients and hospitals designed to serve patients that require intensive medical rehabilitation care. The outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. The Concentra segment consists of medical centers and contract services provided at employer worksites and Department of Veterans Affairs community-based outpatient clinics (CBOCs) that deliver occupational medicine, physical therapy, veteran's healthcare, and consumer health services. As of December 31, 2016, the Company had operations in 46 states and the District of Columbia.

FINANCIAL RATIOS  of  Select Medical Holdings (SEM)

Valuation Ratios
P/E Ratio 20
Price to Sales 0.5
Price to Book 2.8
Price to Tangible Book
Price to Cash Flow 6.6
Price to Free Cash Flow 12.4
Growth Rates
Sales Growth Rate 14.5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -11.5%
Cap. Spend. - 3 Yr. Gr. Rate 17%
Financial Strength
Quick Ratio 2
Current Ratio 0.1
LT Debt to Equity 329%
Total Debt to Equity 335.5%
Interest Coverage 2
Management Effectiveness
Return On Assets 4.6%
Ret/ On Assets - 3 Yr. Avg. 5.3%
Return On Total Capital 3.4%
Ret/ On T. Cap. - 3 Yr. Avg. 4.5%
Return On Equity 13.7%
Return On Equity - 3 Yr. Avg. 15.3%
Asset Turnover 0.9
Profitability Ratios
Gross Margin 14.5%
Gross Margin - 3 Yr. Avg. 14.8%
EBITDA Margin 10.9%
EBITDA Margin - 3 Yr. Avg. 11.2%
Operating Margin 6.7%
Oper. Margin - 3 Yr. Avg. 7.8%
Pre-Tax Margin 4.2%
Pre-Tax Margin - 3 Yr. Avg. 5.5%
Net Profit Margin 2.7%
Net Profit Margin - 3 Yr. Avg. 3.4%
Effective Tax Rate 30.9%
Eff/ Tax Rate - 3 Yr. Avg. 34.3%
Payout Ratio 0%

SEM stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the SEM stock intrinsic value calculation we used $4286 million for the last fiscal year's total revenue generated by Select Medical Holdings. The default revenue input number comes from 2016 income statement of Select Medical Holdings. 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 SEM stock valuation model: a) initial revenue growth rate of 4.1% 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 11.1%, whose default value for SEM is calculated based on our internal credit rating of Select Medical Holdings, 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 Select Medical Holdings.
    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 SEM stock the variable cost ratio is equal to 92.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for SEM 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 5.6% for Select Medical Holdings.

Corporate tax rate of 27% is the nominal tax rate for Select Medical Holdings. 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 SEM 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 SEM are equal to 7.7%.

Life of production assets of 19.7 years is the average useful life of capital assets used in Select Medical Holdings 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 SEM is equal to 3.4%. 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 - $816 million for Select Medical Holdings - 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 134.278 million for Select Medical Holdings 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 Select Medical Holdings at the current share price and the inputted number of shares is $2.3 billion.

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COMPANY NEWS

▶ Stocks Generating Improved Relative Strength: Select Medical   [Jan-05-18 03:00AM  Investor's Business Daily]
▶ Select Medical Sees Relative Strength Rating Climb To 74   [03:00AM  Investor's Business Daily]
▶ Select Medical Clears Key Benchmark, Hitting 80-Plus RS Rating   [Dec-07-17 03:00AM  Investor's Business Daily]
▶ Stocks With Rising Relative Price Strength: Select Medical   [Nov-30-17 03:00AM  Investor's Business Daily]
▶ Select Medical misses 3Q profit forecasts   [05:39AM  Associated Press]
▶ Select Medical beats 2Q profit forecasts   [Aug-05-17 01:13AM  Associated Press]
▶ The 3 Best Hospital Stocks to Buy in 2017   [May-17-17 04:42PM  Motley Fool]
▶ Select Medical beats 1Q profit forecasts   [May-05-17 05:03AM  Associated Press]
▶ Top Ranked Value Stocks to Buy for April 19th   [Apr-19-17 07:52AM  Zacks]
Financial statements of SEM
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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