Chemed Corporation CHE has been gaining on robust segmental growth. Its international performance has also been impressive. Its better-than-expected earnings in the first quarter of 2020 buoy optimism. However, the seasonality of its business and dependence on government mandates are concerning.
Over the past year, the Zacks Rank #3 (Hold) stock has outperformed its industry. The stock has gained 44.1% compared with 8.2% growth of the industry and 8.9% rise of the S&P 500.
The renowned hospice care provider has a market capitalization of $7.55 billion. The company projects 9.8% growth for the next five years and expects to maintain strong segmental performance. Further, it has a positive earnings surprise of 4.4%, on average, for the trailing four quarters.
Let’s delve deeper.
Strong Q1 Results: Chemed’s impressive first-quarter 2020 performance buoys optimism. Further, year-over-year improvement in revenues was driven by strength in both its operating segments. Over the past few quarters, VITAS has been registering continued uptick in total admissions. Expansion of average daily census is also encouraging. Meanwhile, the Roto-Rooter business has been seeing growth on strong performance by the core plumbing, excavation and drain cleaning service segments.
Expansion in both margins in the quarter was also encouraging.
Potential in VITAS Segment: We are optimistic about the continued strong performance from VITAS business over the past few quarters. In the reported quarter, the company’s average daily census and total admissions witnessed an uptick year over year despite the COVID-19-related business disruption since the second half of March. Further, admissions from hospital referrals, home-based admissions and nursing home admissions improved in the first quarter.
Notably, the segment received $80.2 million from the CARES Act Relief Fund as a formulaic calculation applied to VITAS' 2019 Medicare fee-for-service revenues.
Continued Expansion of Roto-Rooter: We are upbeat about the continued momentum of the segment. In the first quarter, the segment performed impressively on a year-over-year basis. Also, on a unit-for-unit basis, excluding the Oakland and HSW acquisitions (completed in July and September 2019, respectively), the segment registered year-over-year growth. Total commercial and residential revenues (including acquisitions) displayed robust growth.
Seasonality of Business: A significant portion of the VITAS business operates in the state of Florida. Majority of Chemed’s patients being Medicare recipients, retirees relocating to Florida during the winter months generally result in higher admissions and revenue concentrated only within Florida during that period. Also, the Roto-Rooter’s revenues and operating results were also impacted by significant changes in weather patterns across the United States.
Dependence on Government Mandates: Over 90% of VITAS’ revenues consist of payments from the Medicare and Medicaid programs, which are increasing pressure to control health care costs and cut or limit increases in reimbursement rates for health care services. Hence, VITAS’ revenues and profitability are subject to the effect of legislative and regulatory changes, including possible reductions in coverage or payment rates or changes in methods of payment by the Medicare and Medicaid programs.
Chemed has been witnessing a positive estimate revision trend for 2020. Over the past 60 days, the Zacks Consensus Estimate for its earnings has moved 0.6% north to $16.43.
The Zacks Consensus Estimate for second-quarter 2020 revenues is pegged at $509.3 million, suggesting a 7.6% rise from the year-ago reported number.
Some better-ranked stocks from the broader medical space are Aphria Inc. APHA, Surmodics, Inc. SRDX and Owens Minor, Inc. OMI.
Aphria’s long-term earnings growth rate is estimated at 24.6%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Surmodics’ long-term earnings growth rate is projected at 10%. The company presently sports a Zacks Rank #1.
Owens Minor’s long-term earnings growth rate is estimated at 8.3%. It currently carries a Zacks Rank #2.
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