Encompass Health Corp (EHC) stock intrinsic value fair value estimate & owner earnings analysis

Encompass Health is the largest operator of inpatient rehabilitation hospitals in the United States: 173 hospitals and 11,465 licensed beds at the end of 2025, in 39 states and Puerto Rico, with concentrations in Florida and Texas. Patients are recovering from strokes, hip fractures and neurological injuries. Medicare and Medicare Advantage together provide about 82% of revenue, so most of the business earns a government-set price per patient and keeps whatever it saves against it. Revenue grew from $4.80 billion in 2023 to $5.37 billion in 2024 and $5.94 billion in 2025, and profit attributable to shareholders was $566.2 million in 2025. In the first half of 2026 revenue was $3.18 billion against $2.91 billion a year earlier, and operating cash flow was $595.7 million against $558.8 million. How we measured the cash the business produces. Many hospitals are joint ventures with local health systems, and the partners' share leaves the company: $152.1 million of cash distributions in 2025 and $125.0 million in 2024. We subtract that. The company spun off Enhabit (home health and hospice) on 1 July 2022, so only 2023 onward describes today's business; 2021 and 2022 are shown for context and their working-capital figures are approximate because the filings still blend in Enhabit. The largest judgement is construction spending. Capital spending has run at 12% to 14% of revenue every year from 2021 to 2025 ($736 million in 2025), against depreciation of $328 million. Management calls only $225 million to $240 million of its $920 million to $995 million 2026 budget nondiscretionary. We do not adopt that classification: because the spending recurs every year, we count nearly all of it ($665 million in 2025) as a cost of staying in business and set aside only a small slice as growth. This is a conservative treatment, and it is the single assumption that moves the result most. After the cost of lenders and partners the business produced about $224 million in 2021, $195 million in 2022, $273 million in 2023, $388 million in 2024 and $432 million in 2025. We measure from the middle of the post-spin-off recovery, using 2024 and 2025 (about $410 million a year); 2023 was still rebuilding, as net income rose from $352 million to $456 million the next year. In 2025 this figure grew 11.5%; our base case assumes 5% in year one, below that. Debt. At 30 June 2026 the company owed $2,634.0 million including $281.7 million of finance leases, and had $107.7 million of cash, which we treat as working cash. The main bonds are 4.50% notes due 1 February 2028 ($792 million carrying value), 4.75% notes due 1 February 2030 ($787 million) and 4.625% notes due 1 April 2031 ($394 million), plus $130 million drawn on the revolver at year-end 2025. The company states it has no significant maturities until 2028. Because those coupons are below what new borrowing would likely cost, we reduce the debt by about $64 million. Base case: the business is worth about $7.3 billion, it owes about $2.57 billion, leaving about $4.74 billion, or $47.41 a share on 100.0 million diluted shares. Growth is limited to what is secured or proven. Seven new hospitals (Irmo SC, Concordville PA, Loganville GA, Norristown PA, San Antonio TX, Bangor ME, Avondale AZ; 349 beds) are expected to open in 2026, a 40-bed satellite and 150 to 200 other beds are planned, and $441 million is still to be spent to finish projects under construction. Beyond that, the company has opened or acquired 78 hospitals and added 4,809 beds (72%) since 2012, about 4.3% a year, over thirteen years that include the 2020 shutdown and the 2022-23 labor squeeze. We credit 5% in year one, then 4%, 4%, 4%, easing to 3.5%, 3%, 3%, 2.5%, 2.5% and 2% by year ten, with no change in margins, tapering because the annual report's cited growth of about 4% a year in the population aged 75 and older runs only through 2030. After year ten we hold earnings flat for twenty years on the existing owned hospitals and credit nothing beyond. Margin expansion, share gains, higher Medicare Advantage rates and any sites not yet announced are left out because nothing in the filings secures them. Bear case: the business is worth about $3.46 billion, it owes about $2.76 billion, leaving about $0.70 billion, or $7.02 a share. The named episode is 2022-23, when staff costs rose faster than Medicare's rate updates (the latest annual report says so for both years): contract labor plus sign-on and shift bonuses rose from $134.2 million to $204.3 million in 2022 and the cash the business produced fell 13%. We repeat that squeeze for two years (about 11% a year after the modest volume from beds already under construction) with no recovery afterward, and the partners take 31% of the pre-partner cash flow as they did in 2021-23, against 24% to 26% in 2024-25. That leaves about $298 million a year, still more than twice the $133 million of annual interest, held flat through year ten and for ten more years, with nothing after. Debt carries an extra cost of about $186 million because the 2028, 2030 and 2031 notes are refinanced 1.5 points higher; the revolver's rate was 7.80% at the end of 2024 and 5.90% at the end of 2025. A further risk we did not size is Medicare's review-choice demonstration, which reaches Texas and California in 2026 and will cover 33 of the company's hospitals (11.9% of its Medicare claims), with CMS intending further expansion. Bull case: the business is worth about $8.17 billion, it owes about $2.57 billion, leaving about $5.61 billion, or $56.05 a share. It starts from 2025's $432 million, grows 6% and 5% as the 2026-27 openings ramp on schedule, then 4.3% (the 13-year record) for five years and 3% for the last three, and is held flat for twenty years after. Margin-of-safety price: $26. We are fairly sure of the level: the 2023 to 2025 figures reconcile to reported cash flow, and the first half of 2026 shows revenue up 9.3%. The weak point is the partners' share: first-half 2026 distributions were $98.1 million against $73.3 million a year earlier, and each extra $25 million a year lowers the base value by about $4.50 a share. The worst plausible outcome is a repeat squeeze combined with tighter Medicare review; the owned hospitals, fixed-rate bonds and absence of large maturities before 2028 should let the company withstand it, but the bear case shows little would be left for shareholders. If we are wrong about construction being a cost of staying in business, the shares are worth far more, and if we are wrong about the partners or labor costs, far less. The price assumes a three-to-four-year holding period, over which the company pays a quarterly dividend; it bought back $158 million of stock in 2025, cutting diluted shares from 102.2 million to 100.0 million. At $26 the equity would be priced at about $2.6 billion against roughly $277 million of annual cash after interest and partners (about 10.6%); with 4% to 5% growth and the gap to value closing over a few years, that outcome implies a 20% annual return even if the squeeze partly recurs. Previous estimates ($56.58, $119.49 and $175.58 in September 2026) were built on a different basis and are not comparable. What changed in the business since: debt rose from $2,490.8 million to $2,634.0 million, partners' payouts rose, and review-choice expansion began in Texas and California.