Select Medical’s results for Q2 saw revenue and GAAP EPS come in ahead of or meeting Wall Street expectations, but the market responded negatively, with shares falling sharply. Management cited ongoing reimbursement pressures in its critical illness recovery hospitals as a key reason for margin compression, particularly related to regulatory changes affecting Medicare payments. CEO Robert Ortenzio acknowledged, “This has resulted in a significant reduction in reimbursement for the higher acuity patients,” and noted that new CMS rules continued to challenge profitability in this segment. Meanwhile, the inpatient rehab and outpatient rehab divisions showed growth, aided by new facility openings and operational improvements, but these bright spots were not enough to offset sector-wide headwinds.
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Select Medical (SEM) Q2 CY2025 Highlights:
- Revenue: $1.34 billion vs analyst estimates of $1.34 billion (4.5% year-on-year growth, in line)
- EPS (GAAP): $0.32 vs analyst estimates of $0.28 (13.9% beat)
- Adjusted EBITDA: $125.4 million vs analyst estimates of $128.4 million (9.4% margin, 2.3% miss)
- The company reconfirmed its revenue guidance for the full year of $5.4 billion at the midpoint
- EPS (GAAP) guidance for the full year is $1.14 at the midpoint, beating analyst estimates by 3.1%
- EBITDA guidance for the full year is $520 million at the midpoint, in line with analyst expectations
- Operating Margin: 6.5%, in line with the same quarter last year
- Sales Volumes were flat year on year (-0.4% in the same quarter last year)
- Market Capitalization: $1.54 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 From Select Medical’s Q2 Earnings Call
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Ann Kathleen Hynes (Mizuho): asked about the critical illness segment’s EBITDA trajectory and whether internal expectations were met. CFO Michael Malatesta responded that results were slightly below expectations in critical illness, but inpatient rehab exceeded forecasts, balancing the overall guidance.
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Ann Kathleen Hynes (Mizuho): inquired about strategy changes if North Carolina eliminates its CON law. CEO Robert Ortenzio said the company would increase focus in the state but remain committed to its joint venture approach rather than aggressive standalone expansion.
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Justin D. Bowers (Deutsche Bank): asked about outpatient rehab’s margin outlook and improvement drivers. Ortenzio expressed optimism about further margin gains, citing upcoming system enhancements and incremental improvements across the large clinic network.
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Benjamin Hendrix (RBC Capital Markets): questioned LTAC margin seasonality and the impact of the latest CMS rule. Ortenzio explained that normal seasonality remains, but margin suppression from regulatory changes will continue, especially in Q3.
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Joaquin Eduardo Arriagada Martinez (Bank of America): sought clarification on the impact of the 20% rule and whether recent regulatory changes would ease margin pressure. Ortenzio said that while the reduction in the proposed outlier threshold was welcome, reimbursement remains challenging and no near-term policy reversal is expected.
Catalysts in Upcoming Quarters
In the upcoming quarters, the StockStory team will be monitoring (1) Select Medical’s ability to execute on its ambitious inpatient rehab expansion pipeline, (2) progress on outpatient rehabilitation margin improvement through system upgrades and scheduling initiatives, and (3) any regulatory developments from CMS that could alter reimbursement rates for critical illness recovery hospitals. The evolution of labor costs and the company’s capacity to balance capital allocation between growth and shareholder returns will also be important signposts.
Select Medical currently trades at $12.20, down from $14.81 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free).
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