Shares of Chemed Corporation CHE reached a new 52-week high of $654.62 on Mar 15, 2024, before closing the session at $646.99.
In the past year, this Zacks Rank #3 (Hold) stock has gained 23.3% compared with the 24.6% rise of the industry and the S&P 500 composite’s return of 31.2%.
In the past five years, Chemed registered earnings growth of 14.1% compared with the industry’s 6.8% rise. The company projected next five-year earnings growth rate of 11.3%. CHE’s earnings surpassed the Zacks Consensus Estimates in two of the trailing four quarters and missed on two occasions, the average surprise being 1.06%.
Chemed is gaining traction from the strong performance across the VITAS and Roto-Rooter segments. Increased growth in licensed healthcare professionals, strong admissions and corresponding growth in the patient census have returned VITAS to normalized operating conditions. However, mounting costs and expenses put pressure on its margins.
Let’s delve deeper.
Key Growth Drivers
VITAS Prospects Bright: Chemed has been registering strong performance from the VITAS business, banking on strength in admissions, which continues to drive higher patient census. The segment’s revenues are driven primarily by a rise in the geographically weighted average Medicare reimbursement rate. In the fourth quarter, VITAS’ net revenues were up 13.6% year over year. The Average Daily Census, or ADC, expanded by 1,918, up 11% in the fourth quarter from the prior-year quarter’s levels.
Roto-Rooter Continues to Expand: Management believes Roto-Rooter is well-positioned for growth and anticipates continued expansion of the segment’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. A notable e-marketing initiative by Roto-Rooter is to expand brand awareness among younger audiences by placing advertisements and content on various social media platforms, including Facebook, Instagram and YouTube.
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The Roto-Rooter marks are among the most highly-recognized trademarks and service marks in the United States.
Hospice Industry Trend Favorable: Within the Hospice segment, we believe that Chemed is well poised to register growth, driven by the growing aging population. As people age, the prevalence of chronic and life-limiting illnesses, such as cancer, heart disease and dementia also increases. This demographic trend drives the hospice market, creating a greater demand for end-of-life care and supportive services.
Further, growing long-term care services for chronic diseases worldwide, such as COPD and heart failure, are likely to boost companies' growth within the industry. According to a report by Market Data Forecast, the global hospice market is estimated to witness a CAGR of 9.1% between 2023 and 2028.
Downsides
Macroeconomics Headwinds Pressuring Margins: Recently, Chemed’s margin performance has been affected by the inflationary trend, increased logistics costs and higher employee-related expenses. Earlier this year, Chemed expected full-year 2023 revenue growth to be negatively impacted by 75 basis points as a result of the sequestration relief in the first half of 2022 compared with a full year of sequestration in 2023.
In the fourth quarter of 2023, the company registered a year-over-year increase of 2.5% in the cost of products and services.
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 providing much of the competition. Hospice care in the United States is 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.
Key Picks
Some other top-ranked stocks in the broader medical space are Cardinal Health CAH, Stryker SYK and DaVita DVA.
Cardinal Health, carrying a Zacks Rank #2 at present, has a long-term estimated earnings growth rate of 14.2% compared with the industry’s 11.6%. CAH’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 15.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Cardinal Health’s shares have gained 59% compared with the industry’s 17.9% rise in the past year.
Stryker, carrying a Zacks Rank #2 at present, has an estimated long-term earnings growth rate of 10.3%. SYK’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 5.1%.
Shares of the company have increased 28.6% compared with the industry’s 8.4% rise in the past year.
DaVita, sporting a Zacks Rank #1 at present, has an estimated long-term earnings growth rate of 12.1% compared with the industry’s 11.9%. DVA’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 35.6%.
Shares of DVA have surged 75.2% compared with the industry’s 24.6% rise in the past year.
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