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Chemed (CHE) Beats on Q3 Earnings & Revenues, View Revised

Chemed Corp.’s CHE third-quarter 2017 adjusted earnings per share (EPS) were $2.15, as compared to the year-ago figure of $1.73. The figure also surpassed the Zacks Consensus Estimate of $2.00.

Quarter in Details

Revenues in the quarter increased 6.3% year over year to $417.4 million, beating the Zacks Consensus Estimate of $415 million.

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

In the third quarter, net revenues at VITAS Healthcare totaled $288.9 million, reflecting an increase of 2.2% year over year. Revenues were driven by a 1.3% increase in the average net Medicare reimbursement rate and a 2.8% rise in average daily census. However, this was offset by acuity mix shift which impacted revenues by 2.2%.

Roto-Rooter reported sales of $128.5 million in the third quarter were up 17.1% year over year. According to the company, revenues from water restoration increased 77.2% year over year to $21.1 million.

Gross margin expanded 274 basis points (bps) year over year to 30.9%. Adjusted operating margin expanded 183 bps to 14.9% in the quarter on a 12.7% rise in selling, general and administrative expenses to $66.9 million.

Chemed exited the third quarter of 2017 with total cash and cash equivalents of $18.9 million, up from $13.8 million at the end of second-quarter 2017. The company had total debt of $82.5 million at the end of the third quarter, compared with $125 million at the end of the preceding quarter. As of Sep 30, 2017, the company had approximately $309 million in undrawn borrowing capacity under its existing five-year credit agreement.

During the third quarter, the company repurchased shares worth $9.6 million. In March 2017, the board had authorized an additional 100 million for Chemed’s existing share repurchase plan. As of Sep 30, 2017, the company had $55.5 million of remaining share repurchase authorization under the plan.

2017 Outlook

The company continues to project VITAS Healthcare revenue growth for 2017 in the range of 2% to 3%, prior to the Medicare Cap. Also, the admissions and Average Daily Census in 2017 is expected to increase 2% to 3% (earlier it was 3% to 5%). Medicare Cap billing limitations are expected at around $1.5 million in 2017, while it was earlier projected at around $2.5 million.

The Roto-Rooter business is estimated to grow 13% to 14% in the full year, as compared with the earlier range of 12% to 13%. The raised guidance was backed by a 2% increase in job pricing and water restoration services growth.

Full-year adjusted EPS is expected to grow in the range of $8.35 to $8.40 ($8.10 to $8.20 previously) as compared with $7.24 reported in 2016.

Our Take

Chemed exited the third quarter on a solid note. Also, the company witnessed year-over-year growth on both the fronts. Moreover, we are encouraged to note that both of the company’s subsidiaries saw year-over-year revenue growth in the quarter. The expansion in gross and operating margin and strong bottom-line projections also buoy optimism.

Further, reimbursement-related issues, seasonality in business, a competitive landscape and dependence on government mandates continue to pose challenges to Chemed.

Zacks Rank & Key Picks

Chemedhas a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader medical sector are PetMed Express, Inc. PETS, Abbott ABT and Intuitive Surgical, Inc. ISRG. Notably, PetMed sports a Zacks Rank #1 (Strong Buy), while Abbott and Intuitive Surgical carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PetMed reported EPS of 43 cents for the second quarter of fiscal 2018, up 79.2% from the year-ago quarter’s 24 cents. Also, gross margin expanded 548 bps year over year to 35.2% in the reported quarter.

Abbott reported third-quarter 2017 adjusted earnings from continuing operations of 66 cents per share, up 11.9% year over year. Also, third-quarter worldwide sales came in at $6.83 billion, up 28.8% year over year. 

Intuitive Surgical posted adjusted earnings of $2.77 per share in the third quarter of 2017, up 34.5% on a year-over-year basis. Also, revenues increased 18% year over year to $806.1 million.

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