Chemed (CHE) Lags Q3 Earnings, Tops Sales; EPS View Up

Chemed Corp. (NYSE:CHE) reported third-quarter 2016 adjusted earnings per share (EPS) of $1.73, missing the Zacks Consensus Estimate by 3.9% as well as the year-ago adjusted number by 2.8%.

Including one-time items, the company reported third-quarter net earnings of $26.8 million or $1.66 per share, down 6.9% or 2.9%, respectively, from the year-ago period.

Quarter in Details

Revenues increased 1.7% year over year to $392.6 million in the third quarter, beating the Zacks Consensus Estimate of $389 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 third quarter, net revenue at VITAS reached $283 million, down 0.8% year over year. The downside primarily resulted due to a 0.6% rise in average Medicare reimbursement rate and a 3% increase in average daily census, offset by acuity mix shift which negatively impacted revenues by 1.7%. The recent alteration in the Medicare hospice reimbursement also impacted revenue growth by 2.1%.

Roto-Rooter reported sales of $110 million in the third quarter, up 8.4% year over year. According to the company, revenue from water restoration increased 46.3% year over year to $11.9 million.

Gross margin contracted 129 basis points (bps) year over year to 28.3%. Adjusted operating margin contracted 197 bps to 13.1% in the quarter, owing to a 6.4% rise in selling, general and administrative expenses to $59.4 million.

Chemed exited third-quarter 2016 with total cash and cash equivalents of $21.3 million, up 21.7% from $17.5 million at the end of second-quarter 2016. The company had total debt of $110.6 million at the end of the quarter, compared to $148 million at the previous quarter’s end. As of Sep 30, 2016, the company had approximately $288 million of undrawn borrowing capacity under its existing five-year credit agreement.

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 Sep 30, 2016, the company had $50.2 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 currently expects its full-year 2016 revenue growth for VITAS (prior to Medicare Cap) in the range of 1%–2% (lower than 1.5%–3% guided earlier). Average Daily Census is estimated to expand approximately 4.5% to 5% (4% to 5%), while Medicare Cap billing limitations are projected at $1.25 million (earlier estimate was $2.5 million). On the other hand, management anticipates full-year 2016 revenue growth of 5%–5.5% for Roto-Rooter (up from the earlier guidance of 4%–5%).

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 $7.20–$7.30, for 2016 (earlier guidance was $7.15–$7.30). The current Zacks Consensus Estimate is pegged at $7.06 for 2016 (considering stock option expense as a regular item).

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. The current two-tiered national per diem rate for RHC is $186.84 for the first 60 days and $146.83 for RHC provided to patients in hospice beyond 60 days.

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 third-quarter 2016, VITAS had a 24.6/75.4 RHC Days-of-Care ratio and generated approximately $1.3 million in SIA payments. This resulted in $6 million less revenue than under the previous Medicare reimbursement methodology.

Our Take

Chemed’s third-quarter 2016 results were a mixed bag, with its bottom line lagging the Zacks Consensus Estimate while revenues exceeded the same. Issues related to declining units for admission remain a headwind. VITAS demonstrated a sluggish show, but we are optimistic about the strong segmental performances at the company. Furthermore, the raised outlook for both the Roto-Rooter segment and bottom-line results is indicative of the fact that the company anticipates improved operating results in the upcoming quarters, therefore inspiring optimism.

However, the reduced outlook for the VITAS segment displays the negative impact that CMS’ recently modified reimbursement in the Medicare hospice space had on Chemed. Moreover, headwinds like seasonality in business, a competitive landscape and dependence on government mandate continue to be challenges for Chemed.

Zacks Rank & Key Picks

Chemed currently has a Zacks Rank #3 (Hold).

Some top-ranked stocks in the broader medical space include GW Pharmaceuticals plc (NASDAQ:GWPH) , Insulet Corporation (NASDAQ:PODD) and Baxter International Inc. (NYSE:BAX) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GW Pharmaceuticals surged 67.4% year to date compared to the S&P 500’s 4.36% over the same period. The company’s four-quarter average earnings surprise is 41.7%.

Insulet Corporation rallied 22.9% in the past one year, higher than the S&P 500’s 2.09%. Over the next five years, the stock is estimated to record an earnings growth rate of 25%, higher than the industry average of 15%.

Baxter’s shares soared 22.7% year to date. Over the next five years, the stock is expected to see 12.3% earnings growth. It has a trailing four-quarter average earnings surprise of 27%.

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