#2 Company pitch

1. Stock pitch

 

I'd like to pitch a long idea on Encompass Health Group, the largest provider of post-acute care services in the U.S., operating over 160 hospitals across the country.

There are three core reasons for this recommendation: structural demand tailwinds, operational defensibility, and an attractive valuation. First, the aging U.S. population continues to drive sustained demand in the post-acute care segment. Encompass benefits from significant scale and regulatory expertise, which create high barriers to entry—particularly in a specialized field like inpatient rehabilitation.

Second, the company has demonstrated strong financial performance, with consistent 5–7% top-line growth and a stable 15% EBITDA margin. Notably, its FCF conversion ratio exceeds 60%, significantly above sector peers. This reflects disciplined capital deployment and strong reimbursement capture.

Third, Encompass is trading at ~12x forward P/E versus the industry average of 15x, offering compelling value relative to its cash flow quality and defensive positioning.

Risks include policy-driven changes to Medicaid reimbursement under the current administration, as well as labor cost pressures tied to specialized clinical staffing. That said, Encompass’s market leadership and operational discipline position it well to navigate these headwinds.

Overall, this is a quality operator in a defensible niche, currently mispriced by the market.

 

2. DCF Pitch

 

Great to speak with you today. Let me walk you through the DCF analysis we ran for Project Jay.

The purpose of this analysis is to help frame a reasonable valuation range based on the company’s long-term cash flow generation, which in turn reflects its core business drivers.

We modeled three scenarios — bull, base, and bear. In the bull case, we assume a favorable reimbursement environment and an uptick in post-acute care demand, driving 7% annual revenue growth with stable 15% EBITDA margins. The base case aligns with historical performance: ~5% top-line growth and constant margins. In the bear case, we reflect pressures from new entrants and rising labor costs, resulting in ~3% revenue growth and a margin compression down to 12%.

For the discount rate, we’ve assumed a risk-free rate of 4.2%, a 3-year beta of 1.2, and an equity risk premium of 6%, resulting in a WACC of 11.16%. Given the company's scale and liquidity, we did not apply an additional premium. We used a terminal growth rate of 1.0%, reflecting a conservative long-run outlook for the sector.

Key sensitivity drivers include patient volume—given that spend per patient is relatively stable — and WACC. Changes in either metric have a material impact on valuation, so we’ve flagged those as key diligence areas going forward.