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Here's Why You Should Add Chemed (CHE) to Your Portfolio Now

Chemed Corporation CHE has been gaining from strength in the Roto-Rooter business. The company exited the third quarter of 2021 with better-than-expected results. The sequential growth in VITAS admissions buoys optimism. A good solvency position is an added advantage. However, pandemic-led disruption in the VITAS arm and stiff competition raise concern.

Over the past year, the Zacks Rank #2 (Buy) stock has gained 2.7% against 35.5% decline of the industry and a 33.9% rise of the S&P 500.

The renowned hospice care provider has a market capitalization of $7.68 billion. Its earnings for the third quarter of 2021 surpassed the Zacks Consensus Estimate by 13.5%.

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Over the past five years, Chemed’s earnings grew 22.7%, way ahead of the industry’s 17.3% rise and the S&P 500’s 2.8% increase. The company projects 7.5% growth for the next five years compared with the industry’s projected growth rate of 20.8% and the S&P 500’s estimated 11.7% growth.

Factors At Play

Q3 Upsides: Chemed ended the third quarter of 2021 on a bullish note with better-than-expected earnings and revenues. The figures showed year-over-year improvement as well. The robust revenue growth across Roto-Rooter is encouraging. The decline in operating expenses and expansion of both margins during the quarter look promising. The full-year strong projection for Roto Rooter revenues, as well as the company’s revised 2021 EPS estimate exceeding the Zacks Consensus Estimate,  instill optimism.

VITAS Prospects Bright: We are upbeat about Chemed’s VITAS arm, which has been registering robust performance over the past few quarters. The total VITAS admissions in the third quarter were 17,598, which registered a 4.5% increase compared with the second quarter of 2021. Meanwhile, the company saw a 2% increase in hospital-directed admissions, a 16.3% rise in total home-based pre-admit admissions, an 8.9% spike in nursing home admissions and a 5% increase in assisted living facility admissions, all on a sequential basis. The company’s updated guidance suggests a sequential improvement in senior housing base patients in the fourth quarter of 2021 as well as acceleration in senior housing admissions in 2022. This is indicative of the fact that senior housing has already entered the early stages of recovery.

Roto-Rooter Continues to Expand: Roto-Rooter is currently the nation’s leading provider of plumbing, drain cleaning service and water restoration, providing services to more than 90% of the population in the United States. The segment’s third-quarter revenue growth surged 15.7% year over year, raising our optimism. Total branch commercial revenues improved 10% on a 17.6% increase in drain cleaning revenues, 9.3% rise in commercial plumbing, 1.3% decline in excavation revenues and 9.4% hike in commercial water restoration revenues. Further, total Roto-Rooter branch residential revenues registered growth of 17.2% on an 11.7% rise in residential drain cleaning revenues, 17.4% improvement in plumbing, 14.1% increase in excavation and 28% growth in residential water restoration.

Strong Solvency: Chemed exited the third quarter of 2021 with cash and cash equivalents of $28.7 million, marking a significant decline from $92.1 million at the end of the second quarter. Yet, similar to second-quarter 2021, there was no long-term debt at the end of the third quarter, implying that the solvency level of Chemed is pretty promising.

Downsides

Pandemic Causes Revenue Erosion: The VITAS segment continued to be challenged by pandemic-led disruptions to senior housing occupancy and the recent hospice referrals in the third quarter. The company continued to witness disruption in referrals from senior housing, particularly from nursing homes and assisted-living facilities.

Tough Competitive Landscape: The market for sewer, drain and pipe cleaning and plumbing repair businesses is highly competitive. Competition is fragmented in most markets, with local and regional firms acting as Chemed’s main rivals. Besides, Hospice care in the United States is also competitive, as programs for hospice services are generally uniform. 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

Chemed is witnessing a positive estimate revision trend for 2021. Over the past 90 days, the Zacks Consensus Estimate for its earnings has moved 3.9% north to $19.14.

The Zacks Consensus Estimate for the company’s fourth-quarter 2021 revenues is pegged at $544.3 million, suggesting a 2.1% rise from the year-ago reported number.

Other Key Picks

A few similarly ranked stocks in the broader medical space are Bio-Rad Laboratories, Inc. BIO, Laboratory Corporation of America Holdings or LabCorp LH and Hill-Rom Holdings, Inc. HRC, each carrying a Zacks Rank #2 (Buy).

Bio-Rad reported third-quarter 2021 adjusted EPS of $3.71, which beat the Zacks Consensus Estimate by 61.3%. Further, it surpassed earnings estimates in all of the trailing four quarters, delivering a surprise of 71.34%, on average.

Over the past year, Bio-Rad has outperformed its industry. The stock has gained 21.9% compared to the industry’s 2.1% growth. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

LabCorp reported third-quarter 2021 adjusted EPS of $6.82, surpassing the Zacks Consensus Estimate by 42.9%. The company surpassed earnings estimates in all of the trailing four quarters, delivering an average surprise of 25.73%.

LabCorp outperformed the industry it belongs to in the past year. The stock has gained 40.9% versus the industry’s 18.1% growth.

Hill-Rom reported fourth-quarter fiscal 2021 adjusted EPS of $1.67, which surpassed the Zacks Consensus Estimate by 13.6%. The company surpassed earnings estimates in all of the trailing four quarters, delivering an average surprise of 20.82%.

Over the past year, Hill-Rom has outperformed its industry. The stock has gained 65.7% compared to the industry’s 2% growth.


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Laboratory Corporation of America Holdings (LH): Free Stock Analysis Report
 
BioRad Laboratories, Inc. (BIO): Free Stock Analysis Report
 
HillRom Holdings, Inc. (HRC): Free Stock Analysis Report
 
Chemed Corporation (CHE): Free Stock Analysis Report
 
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