Chemed (CHE) Q2 Earnings & Revenues Rise Y/Y, View Revised

Chemed Corp.’s (NYSE:CHE) second-quarter 2017 adjusted earnings per share (EPS) (considering stock-based compensation expenses and related tax benefit as a regular one) were $2.19, as compared to the year-ago adjusted EPS figure of $1.71, up 28.1% year over year.

Including one-time items, the company reported second-quarter net loss of $1.35 per share, comparing unfavorably with earnings of $1.48 a year ago.

Quarter in Details

Revenues in the quarter increased 6.3% year over year to $415.1 million, beating the Zacks Consensus Estimate of $405.4 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 services provider.

In the second quarter, net revenue at VITAS Healthcare totaled $284.7 million, reflecting an increase of 2.1% year over year. The quarter’s revenues were driven by a 1.7% 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 negatively impacted revenues by 2.5%.

Roto-Rooter reported sales of $130.3 million in the second quarter, up 16.7% year over year. According to the company, revenues from water restoration increased 72.1% year over year to $20.9 million.

Gross margin expanded 189 basis points (bps) year over year to 32.1%. Adjusted operating margin expanded 139 bps to 14.6% in the quarter on a 9.6% rise in selling, general and administrative expenses to $68.7 million.

Chemed exited the second quarter of 2017 with total cash and cash equivalents of $13.8 million, down from $47 million at the end of first-quarter 2017. The company had total debt of $125.0 million at the end of the second quarter, compared with $146.9 million at the end of the preceding quarter. As of Jun 30, 2017, the company had approximately $269 million in undrawn borrowing capacity under its existing five-year credit agreement.

During the second quarter, the company repurchased shares worth $30.8 million. In Mar 2017, the board had authorized an additional 100 million for Chemed’s existing share repurchase plan. As of Jun 30, 2017, the company had $65.1 million of remaining share repurchase authorization under the plan.

2017 Outlook

VITAS Healthcare revenue growth projection for 2017 was revised downward to the range of 2% to 3% prior to the Medicare Cap from the earlier range of 4% to 5%. Also, the admissions and Average Daily Census in 2017 is expected to increase 3% to 5% (earlier it was 3% to 4%). Medicare Cap billing limitations are expected at around $2.5 million in 2017, while it was around $3.7 million earlier.

The Roto-Rooter business is estimated to grow 12% to 13% in the full year, as compared with the earlier provided range of 3% to 4%. 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 $8.10 to $8.20 ($7.80 to $8.00 previously) as compared with $7.24 reported in 2016.

Our Take

Chemed’s better-than-expected revenue performance in the second quarter on the back of solid growth in its Roto-Rooter business buoys optimism. Also, we are encouraged to note that both of the company’s subsidiaries saw year-over-year revenue growth in the quarter. The strong bottom-line projection also raises hopes. However, the downward revision of the revenue growth guidance for VITAS Healthcare is a matter of concern.

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

Chemed currently has a Zacks Rank #3 (Hold).A few better-ranked medical stocks are Mesa Laboratories, Inc. (NASDAQ:MLAB) , INSYS Therapeutics, Inc. (NASDAQ:INSY) and Align Technology, Inc. (NASDAQ:ALGN) . Notably, INSYS Therapeutics and Align Technology sport a Zacks Rank #1 (Strong Buy), while Mesa Laboratories carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Align Technology has an expected long-term adjusted earnings growth of almost 24.1%. The stock has added roughly 35.7% over the last three months.

INSYS Therapeutics has a long-term expected earnings growth rate of 20%. The stock has gained around 4.3% over the last three months.

Mesa Laboratories has a positive earnings surprise of 2.84% for the last four quarters. The stock has added roughly 3.1% over the last three months.

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