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Chemed (CHE) Q1 Earnings Miss the Mark, Revenues in Line

Chemed Corp. CHE reported first-quarter 2016 adjusted earnings per share (EPS) (considering stock option expense as a regular expenditure) of $1.53, lagging the Zacks Consensus Estimate by 5 cents. Adjusted EPS, however, was 13.3% higher than the year-ago quarter number. Solid revenue growth during the quarter primarily led to the year-over-year earnings improvement.

Including one-time items, the company reported first-quarter net earnings of $24.8 million or $1.45 per share, up 1.2% or 3.6%, respectively, from the comparable year-ago figures.

 

Quarter in Details

Revenues increased 3.6% year over year to $390.4 million in the first quarter, almost in line with the Zacks Consensus Estimate of $391 million.

Chemed currently operates in the form of two wholly-owned subsidiaries viz. VITAS Healthcare Corporation – a major provider of end-of-life care, and Roto-Rooter – a leading commercial and residential plumbing and drain cleaning services provider.

In the first quarter, net revenue at VITAS reached $278 million, up 2.9% year over year. The upside came primarily on the back of a 0.6% rise in average Medicare reimbursement rate and a 5.6% increase in average daily census, offset by mix shift, when compared to the prior-year period that negatively impacted revenues by 1.8%. The recent change in the Medicare hospice reimbursement also impacted revenue growth by 2.1%.

Roto-Rooter reported sales of $113 million in the first quarter, up 5.4% year over year. According to the company, commercial revenue increased 4.9% on a 10.6% rise in Commercial drain cleaning revenue and a 0.9% rise in commercial plumbing and excavation revenues. Residential revenues increased 6.1% with a 6% rise in Residential plumbing and excavation. Drain cleaning sales were flat, whereas water restoration increased 23.3%

Gross margin was up 7 basis points (bps) year over year at 28.7%. Adjusted gross margin, excluding the impact of Medicare Cap, was 21%, down 14 bps year over year. Adjusted operating margin contracted 62 bps to 13.6% in the quarter. During the reported quarter, selling, general and administrative expenses remained at $59 million, unchanged year over year.

Chemed exited the first quarter of 2016 with total cash and cash equivalents of $15.2 million, down 46.3% from $28.3 million at the end of 2015. The company had total debt of $144.9 million at the end of the quarter, compared to $35.7 million at 2015 end. As of Mar 31, 2016, the company had approximately $257 million of undrawn borrowing capacity under its existing five-year credit agreement.

Moreover, in the first quarter, the company bought back $52.5 million worth of stock.On Mar 11, 2016, Chemed’s Board of Directors authorized an additional $100 million for stock repurchase under the company’s existing share repurchase program. As of Mar 31, 2016, there is $100 million of remaining share repurchase authorization under this plan.

2016 Outlook

On Jan 1, 2016, CMS implemented a revenue neutral rebasing to the Medicare hospice reimbursement per diem. Including the impact of rebasing, Chemed expects its full-year 2016 revenue growth for VITAS (prior to Medicare Cap) in the range of 2.5%–3.5% (unchanged from the earlier declared guidance). Admissions in 2016 are estimated to increase 3%, while Medicare Cap billing limitations are projected at $3.8 million (earlier estimate was 5%). On the other hand, management expects full-year 2016 revenue growth of 3.5%–4.5% for Roto-Rooter (unchanged).

Including the impact of rebasing, the company expects to deliver adjusted EPS (considering stock option expense as a one-time item) in the range of $7.05–$7.25, for 2016 (unchanged).

Reimbursement-Related Update

CMS’ implementation of a refinement to the Medicare hospice reimbursement per diem eliminated the single-tier per diem for routine home care (RHC) and replaced it with a two-tiered rate, with a higher per diem rate for the first 60 days of a hospice patient’s care, and a lower rate for day 61 and after. In addition, CMS provided for a Service Intensity Add-on (SIA) payment, which provides for reimbursement of care provided by a registered nurse or social worker for RHC patients within seven days prior to death.

According to Chemed, rebasing in 2016 would be revenue neutral to a hospice if it has 37.6% of total RHC days-of-care being provided to patients in their first 60 days of admission and 62.4% of total RHC days-of-care provided to patients after the 60 days. In the first quarter of 2016, VITAS had a 25/75 RHC Days-of-Care ratio and generated approximately $1.0 million in SIA payments. This resulted in 2.1% less revenue than under the previous Medicare reimbursement methodology.

Our Take

Chemed has commenced 2016 on a disappointing note with first-earnings lagging behind the Zacks Consensus Estimate while revenues met the same. Issues related to admission coding changes remained a matter of concern. However, we are encouraged by the strong segmental performances at the company. Among the two key operating metrics – admissions and average daily census – while overall admissions were distorted by the closing of three small programs, average daily census continued to gain momentum in the quarter. Nonetheless, headwinds like seasonality in business, competitive landscape and dependence on government mandate are intimidating.

Zacks Rank

Currently, Chemed retains a Zacks Rank #3 (Hold). Some better-ranked medical stocks are Almost Family Inc. AFAM, Amedisys Inc. AMED and HEALTHSOUTH Corp. HLS. All the three stocks hold a Zacks Rank #2 (Buy).

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AMEDISYS INC (AMED): Free Stock Analysis Report
 
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ALMOST FAMILY (AFAM): Free Stock Analysis Report
 
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