Encompass Health

Encompass Health Corp is assigned a 3-star quantitative star rating, reflecting our opinion that this share class is a balanced choice, but prudent investors should consider looking elsewhere. The stock currently trades at a 9% discount to our quantitative fair value estimate of $133.40 per share, which is reinforced by this estimate's low uncertainty rating. We require the price/fair value ratio to move a certain amount before the star rating can change. This stability-enhancing buffer is in effect for this stock.

The firm's valuation metrics increase our estimated fair value. A company's valuation metrics provide insights into the market's expectations for its future growth and profitability. For example, the firm's enterprise value to market value ratio of 1.3 falls in the top 40% compared with global peers. While highly leveraged firms can be risky, they can also be highly rewarding. This company's high enterprise value relative to its market value suggests that wise investments will yield outsize returns for investors. We believe this is a sign that shares could be cheap.

The company's profitability is an additional encouraging factor. Highly profitable companies are often more resilient in recessions and are likely to generate stronger future cash flows for shareholders. The firm's gross margin, a core component of profitability, ranks in the top 1% globally. This suggests that it will more easily generate cash flow than peers. This characteristic further promotes our favorable price/fair value ratio.

The company's narrow economic moat rating suggests it should be able to maintain robust profitability for a decade or longer before competition erodes its advantage. In addition, the company's moderate financial health score is decent and doesn't seriously concern us with regard to financial distress.