Select Medical’s first quarter results were met with a sharp negative reaction from the market, reflecting revenue and earnings that fell short of Wall Street’s expectations. Management attributed the underperformance to ongoing regulatory pressures in its critical illness recovery hospitals and short-term volume declines, particularly in its outpatient division, which was further impacted by adverse weather events and lower Medicare reimbursements. Executive Chairman Robert Ortenzio acknowledged these challenges, emphasizing, “Approximately two-thirds of the EBITDA miss to prior year was a result of regulatory changes comprised of the increase to the outlier threshold and the 20% transmittal rule.”
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Select Medical (SEM) Q1 CY2025 Highlights:
- Revenue: $1.35 billion vs analyst estimates of $1.39 billion (2.4% year-on-year growth, 2.6% miss)
- EPS (GAAP): $0.44 vs analyst expectations of $0.47 (7.3% miss)
- Adjusted EBITDA: $151.4 million vs analyst estimates of $166.5 million (11.2% margin, 9.1% miss)
- The company dropped its revenue guidance for the full year to $5.4 billion at the midpoint from $5.5 billion, a 1.8% decrease
- EPS (GAAP) guidance for the full year is $1.14 at the midpoint, beating analyst estimates by 1.8%
- EBITDA guidance for the full year is $520 million at the midpoint, below analyst estimates of $531.3 million
- Operating Margin: 8.3%, in line with the same quarter last year
- Sales Volumes fell 1.9% year on year (1% in the same quarter last year)
- Market Capitalization: $1.92 billion
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions Select Medical’s Q1 Earnings Call
- Justin Bowers (Deutsche Bank) asked about expected occupancy rates in the rehabilitation segment as new capacity comes online. Executive Chairman Robert Ortenzio projected occupancy would remain around 85% for mature hospitals, even with ongoing expansion.
- Ben Hendrix (RBC Capital Markets) questioned mitigation strategies for the high cost outlier and transmittal rule headwinds in critical illness recovery hospitals. Ortenzio indicated that while some seasonal factors may ease pressures, substantive change depends on ongoing discussions with CMS and legislators.
- William Sutherland (The Benchmark Company) inquired about the magnitude of start-up costs for new facilities and their impact on guidance. Senior EVP Martin Jackson responded that start-up losses are expected to be similar to last year, with no unusual costs in the quarter.
- William Sutherland (The Benchmark Company) sought clarity on the timing and impact of regulatory headwinds, specifically whether the revised guidance primarily reflects weakness in the first part of the quarter. Ortenzio confirmed that most of the adverse impact was concentrated in the first six weeks, particularly in the critical illness recovery segment.
- Anne Hines (Mizuho) asked about further acceleration in rehabilitation hospital expansion as a strategy to offset regulatory risk. Ortenzio confirmed that additional projects are in the pipeline and that growth in rehabilitation is a key strategic focus.
Catalysts in Upcoming Quarters
Looking ahead, the StockStory team is monitoring (1) the pace of new rehabilitation hospital openings and their occupancy ramp, (2) margin recovery efforts in the outpatient division through technology and commercial rate improvements, and (3) any regulatory developments impacting Medicare reimbursement in critical illness recovery hospitals. The effectiveness of advocacy with CMS and the stabilization of weather-related disruptions will also be key factors influencing Select Medical’s performance.
Select Medical currently trades at $15.01, down from $18.23 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free).
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