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Here's Why You Should Hold on to Chemed (CHE) Stock Now

Chemed Corporation CHE is gaining from continued strength in the Roto-Rooter segment. The company’s earnings for the second quarter of 2022 beat the Zacks Consensus Estimate. The improvement in assisted living facility admissions buoys optimism. A favorable solvency position is encouraging too. However, the continued sales decline in the VITAS arm and pandemic-led disruptions do not bode well.

In the past year, the Zacks Rank #3 (Hold) stock has gained 0.1% against a 36.6% fall of the industry and a 13.9% drop of the S&P 500.

The renowned hospice care provider has a market capitalization of $7.1 billion. Its earnings surpassed estimates in the trailing four quarters, the average surprise being 6.3%.

In the past five years, the company registered earnings growth of 24.5% compared with the industry’s 13.2% rise and the S&P 500’s 13.4% increase. The company projects 7.8% growth for the next five years compared with the industry and the S&P 500’s projected growth rate of 11.5% and 11.4%, respectively.

Zacks Investment Research
Zacks Investment Research


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Let’s delve deeper.

Factors at Play

Impressive Q2 Results: Chemed ended the second quarter with better-than-expected earnings. The year-over-year growth in adjusted earnings per share appears promising. Robust performance by the Roto-Rooter segment drove the top line. Chemed’s nursing home admissions in the second quarter rose 5.3%. Assisted living facility admissions increased 5.6% and home-based pre-admit admissions moved up 0.2% on a year-over-year basis, respectively. The expansion of gross and operating margins adds to the upsides.

Roto-Rooter Continues to Expand: We are encouraged by Chemed’s Roto-Rooter segment, which delivered revenue growth of 6% year over year in the second quarter. The business witnessed continued demand for plumbing, drain cleaning service and water restoration services in the quarter under review. Total Roto-Rooter branch commercial revenues rose 7.5%. Total Roto-Rooter branch residential revenues registered growth of 5% on a year-over-year basis.

Management at Chemed anticipates the continued expansion of Roto-Rooter’s market share, banking on the company’s core competitive advantages in terms of brand awareness, customer response time and 24/7 call centers and Internet presence.

Strong Solvency: Chemed exited the second quarter of 2022 with cash and cash equivalents of $9.6 million. Long-term debt at Q2 2022-end was $111.8 million, much higher than the current-cash level. While exiting the quarter, the company reported short-term payable debt of $5 million. This is good news regarding Chemed’s solvency position, as the company holds sufficient cash for short-term debt repayment during the economic downturn.

Downsides

VITAS Results Discouraging: Chemed’s VITAS revenues registered a 4.5% year-over-year decline in the second quarter. The segment continued to be challenged by pandemic-related issues, including health care labor shortages, disruption in senior housing occupancy and related hospice referrals. VITAS admissions were down 12.5% on a year-over-year basis in the quarter under review.

Pandemic-Related Challenges: The pandemic continues to impact senior housing occupancy, leading to a corresponding reduction in VITAS nursing home admissions. Evidently, nursing home patients accounted for 16.4% of VITAS’ second-quarter patient census compared to 18% of the total census just prior to the pandemic. Further, pandemic-led staffing challenges continue to impact the Roto-Rooter arm.

Tough Competitive Landscape: The market for sewer, drain and pipe cleaning and plumbing repair businesses is highly competitive, with the presence of several local and regional firms. Besides, as the hospice care industry is highly fragmented, VITAS competes with a large number of organizations on the basis of its ability to deliver quality, responsive services.

Estimate Trend

The Zacks Consensus Estimate for Chemed’s 2022 earnings is pegged at $19.48, indicating an increase of 0.8% from the year-ago figure.

The Zacks Consensus Estimate for the company’s 2022 revenues is pegged at $2.15 billion, suggesting a 0.4% rise from the year-ago reported number.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are AMN Healthcare Services, Inc. AMN, Patterson Companies, Inc. PDCO and McKesson Corporation MCK.

AMN Healthcare has a long-term earnings growth rate of 3.2%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.7%, on average. It currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry in the past year. AMN has lost 11.2% against the industry’s 38.2% fall.

Patterson Companies has an estimated long-term growth rate of 7.9%. The company’s earnings surpassed estimates in all the trailing four quarters, the average beat being 16.5%. It currently flaunts a Zacks Rank #2 (Buy).

Patterson Companies has underperformed its industry in the past year. PDCO lost 17.4% compared with the industry’s 14.8% fall in the past year.

McKesson has an estimated long-term growth rate of 9.9%. The company surpassed earnings estimates in the trailing three quarters and missed in one, delivering a surprise of 13%, on average. It currently carries a Zacks Rank #2.

McKesson has outperformed its industry in the past year. MCK has gained 77.5% against the industry’s 14.8% fall.


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