Medical Shares Drop 20% Despite Strong Q2 Earnings

Select Medical Holdings Corporation Faces Market Volatility Following Q2 2025 Results

Shares of Select Medical Holdings Corporation (SEM) have experienced a significant drop of 20.4% since the company released its second-quarter 2025 results on July 31. The decline was primarily attributed to lower occupancy rates in the Rehabilitation Hospital segment, along with increased operational costs and expenses. Despite these challenges, there were positive developments, including improved revenue per patient day in the Rehabilitation Hospital segment, higher occupancy rates in the Critical Illness Recovery Hospital, and an increase in admissions.

Strong Earnings Performance Amid Mixed Financials

Select Medical reported adjusted earnings per share (EPS) of 32 cents for the quarter, surpassing the Zacks Consensus Estimate of 28 cents. However, this figure represents a decrease from 60 cents in the same period last year. The company’s net operating revenues reached $1.3 billion, marking a 4.5% increase compared to the previous year. This performance exceeded the consensus estimate by 1.5%, showcasing some resilience in the face of rising costs.

The company’s total costs and expenses rose by 3.9% year over year to $1.3 billion, which surpassed the estimated $1.2 billion. The increase was driven by higher service costs, excluding depreciation and amortization. Adjusted EBITDA stood at $125.4 million, slightly up from $124.7 million in the prior-year quarter but still below the expected $129 million.

Segmental Performance Analysis

Critical Illness Recovery Hospital

Revenues for the Critical Illness Recovery Hospital segment totaled $601.1 million, a 0.6% decrease from the previous year. This fell short of the consensus estimate of $641.4 million. The segment faced a 0.5% decline in revenue per patient day, with a slight decrease in patient days and a modest 0.9% increase in admissions. However, the occupancy rate improved by 200 basis points year over year.

Adjusted EBITDA for the segment declined by 21.6% to $56.3 million, missing both the Zacks Consensus Estimate and internal projections. The adjusted EBITDA margin dropped 250 basis points to 9.4%.

Rehabilitation Hospital

In contrast, the Rehabilitation Hospital segment saw strong growth, with revenues increasing by 17.2% year over year to $313.8 million, well above the consensus estimate of $264.8 million. This was driven by a 9.3% rise in admissions and a 7.6% increase in patient days. However, the occupancy rate declined by 200 basis points.

Adjusted EBITDA for the segment rose by 14.7% to $71 million, beating the Zacks Consensus Estimate of $57 million. The adjusted EBITDA margin decreased by 50 basis points to 22.6%.

Outpatient Rehabilitation

The Outpatient Rehabilitation segment recorded revenues of $327.6 million, a 3.8% increase from the previous year. This outperformed the consensus estimate of $318.2 million. Revenue per patient visit remained stable year over year.

Adjusted EBITDA for the segment increased by 6.1% to $30.5 million, though it missed the Zacks Consensus Estimate of $42.7 million. The adjusted EBITDA margin improved by 20 basis points to 9.3%.

Financial Position as of June 30, 2025

As of June 30, 2025, Select Medical held $52.3 million in cash and cash equivalents, down from $59.7 million at the end of 2024. Total assets rose to $5.7 billion from $5.6 billion, while long-term debt, net of the current portion, increased to $1.8 billion from $1.7 billion. Total equity grew by 2.4% to $2 billion.

The company generated $110.3 million in net cash from operations during the quarter, a significant drop from $278.2 million in the same period last year.

Share Repurchase and Dividend Update

Select Medical repurchased shares worth $96.5 million in the first half of 2025. Since the inception of the stock repurchase program, the company has bought back shares totaling approximately $696.8 million. On July 30, 2025, management approved a cash dividend of 6.25 cents per share, set to be paid on August 28 to shareholders of record as of August 13.

Reaffirmation of 2025 Outlook

Management reaffirmed its 2025 outlook, projecting revenues between $5.3 billion and $5.5 billion, with adjusted EBITDA expected to range between $510 million and $530 million. EPS is still anticipated to fall between $1.09 and $1.19, with interest expense expected to reach $116 million.

Zacks Rank and Key Stock Picks

Currently, SEM holds a Zacks Rank of #3 (Hold). In the medical sector, several stocks are rated higher, including West Pharmaceutical Services Inc (WST), Fresenius Medical Care AG & Co. (FMS), and Tenet Healthcare Corp (THC), each carrying a Zacks Rank of #1 (Strong Buy).

West Pharmaceutical Services has seen four upward revisions to its earnings estimates in the past 30 days, with an average earnings surprise of 16.8% over the last four quarters. Its consensus revenue estimate stands at $3 billion, reflecting a 4.2% year-over-year growth.

Fresenius Medical Care has had two upward revisions in its earnings estimates over the past 60 days, with an average earnings surprise of 6.6%. Its revenue forecast for the year is $22 billion, indicating a 5.2% increase from the previous year.

Tenet Healthcare has seen seven upward revisions to its earnings estimates in the last 30 days, with an average earnings surprise of 31.2% over the last four quarters. Its revenue forecast is pegged at $21.1 billion, showing a 2.1% year-over-year growth.