Deutsche Bank Gives Update On RehabCare Group; Raises PT

Deutsche Bank has updated RehabCare's RHB 2011 estimates to reflect slightly lower margins, and is establishing 2012E. The new $30 price target is based off these out-year forecasts. While RHB's discounted valuation seems tempting, DB remain concerned about the longer-term regulatory issues and margins in the LTACH segment. For these reasons, it maintains a Hold, although it is expected RHB's relative valuation discount to close in over the next few quarters as operating execution continues to improve. Deutsche Bank revised its 2011 EPS estimate to $2.78 from $2.92 to reflect slightly lower Hospital segment and SRS segment margins; this adjustment puts us closer to consensus. Relative to other Street models, Deutsche Bank is expecting better top-line performance from HRS due to recent sales-force initiatives and IRF-unit discharge growth, but is projecting slightly lower Hospital segment margin performance due to its view of this segment's normalized margin structure and modest pressure from ongoing project start-up costs. Consistent with Deutsche Bank's process in which it establishes new out-year estimates, it is rolling forward its 12-month valuation objective to base off forward CY forecasts. Therefore it raises the price target to $30 while maintaining a Hold rating. RHB closed Friday at $25.29