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Why Is Chemed (CHE) Up 2.7% Since Last Earnings Report?

Zacks Equity Research
FTI Consulting (FCN) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

It has been about a month since the last earnings report for Chemed (CHE). Shares have added about 2.7% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Chemed due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Chemed Gains on Overall Growth in Q4

Chemed delivered fourth-quarter 2018 adjusted earnings per share (EPS) of $3.35, up 44.3% year over year. The adjusted number also surpassed the Zacks Consensus Estimate of $3.27 by 2.4%.

Reported EPS came in at $3.26, up 0.3% year over year.

For the full year, adjusted EPS was $11.93, reflecting an increase of 41.5% from the year-ago period.

Revenues in the reported quarter increased 6.8% year over year to $457.5 million. For the full year, the company reported revenues of $1.78 billion, up 6.6% from the year-ago period.

Segmental details

Chemed operates through two wholly-owned subsidiaries, namely, VITAS (a major provider of end-of-life care) and Roto-Rooter (a leading commercial and residential plumbing plus drain cleaning service provider).

In the fourth quarter, net revenues at VITAS totaled $306.9 million, reflecting an increase of 4.9% year over year. The top line was driven by 1.1% growth in geographically weighted average Medicare reimbursement rate and a 7.3% rise in average daily census. A Medicare Cap liability partially offset this revenue improvement by 0.4%. The revenue strength was partially offset by acuity mix shift, which negatively impacted revenues by 1.0%.

Roto-Rooter reported sales of $150.5 million in the fourth quarter rose 10.6% year over year. According to the company, revenues from water restoration increased 9.7% year over year to $24.3 million. The upside was driven by 12% year-over-year growth in commercial revenues and 11.4% rise in residential revenues.

Margin details

Gross profit increased 5.5% year over year to $144.4 million in the fourth quarter of 2018. However, gross margin contracted 37 basis points (bps) year over year to 31.5%.  Adjusted operating profit saw growth of 20.7% from the year-ago period to $78.7 million. This was on account of declining operating costs. Accordingly, the operating margin expanded 197 bps to 17.2%.

Operational update

Chemed exited 2018 with total cash and cash equivalents of $4.83 million, showing a significant decline from $11.1 million at the end of 2017. The company had total debt of $89.2 million at the end of 2018, which again reflected a decline from $101.2 million at the end of 2017. During the fourth quarter, the company repurchased shares worth $36.9 million.

At the end of 2018, net cash provided by operating activities was $287.1 million, compared with $162.5 million at 2017-end.

Guidance for 2019

Chemed has provided guidance for 2019.The company projects VITAS Healthcare revenue growth (prior to Medicare Cap) within 5.5-6%. In 2019, admissions within this segment are anticipated to improve 3-4% and Average Daily Census is predicted to rise 4-5%. Medicare Cap billing limitations are expected to cap around $10 million.

The Roto-Rooter business is likely to register revenue growth of 13-14% in the year. The view was backed by a 2% increase in job pricing, consistent growth in core plumbing plus drain cleaning services as well as revenue generation from water restoration services.

The Zacks Consensus Estimate of 2019 revenues is pegged at $1.87 billion.

Adjusted EPS for 2019 has been projected in the range of $12.65-$12.85. The Zacks Consensus Estimate of $12.64 is below the low end of the guidance provided by the company.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Chemed has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Chemed has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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