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Chemed (CHE) Lags Q2 Earnings, Tops Revenues, View Up

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Chemed Corp. (CHE - Free Report) reported second-quarter 2016 adjusted earnings per share (EPS) (considering stock option expense as a regular expenditure) of $1.71, missing the Zacks Consensus Estimate by a penny.

Adjusted EPS, however, was 3% higher than the comparable year-ago quarter number. Strong revenue growth during the quarter drove the year-over-year earnings improvement.

Including one-time items, the company reported second-quarter net earnings of $24.9 million or $1.48 per share, down 7.7% or 4.5%, respectively, from the comparable year-ago figures.

CHEMED CORP Price, Consensus and EPS Surprise

CHEMED CORP Price, Consensus and EPS Surprise | CHEMED CORP Quote

Quarter in Details

Revenues increased 2.1% year over year to $390.4 million in the second quarter, beating the Zacks Consensus Estimate of $390 million by a whisker.

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 second quarter, net revenue at VITAS reached $279 million, up 0.8% year over year. The upside came primarily on the back of a 0.6% rise in average Medicare reimbursement rate and a 4.4% increase in average daily census, offset by acuity mix shift which negatively impacted revenues by 1.9%. The recent alteration in the Medicare hospice reimbursement also impacted revenue growth by 2%.

Roto-Rooter reported sales of $112 million in the second quarter, up 5.9% year over year. According to the company, revenue from water restoration increased 32.7% year over year to $12.1 million.

Gross margin was up 20 basis points (bps) year over year at 29.3%. Adjusted operating margin contracted 60 bps to 13.2% in the quarter, owing to a 7.2% rise in the reported quarter’s selling, general and administrative expenses of $62.6 million.

Chemed exited the second-quarter 2016 with total cash and cash equivalents of $17.5 million, up 15.1% from $15.2 million at the end of first-quarter 2016. The company had total debt of $148 million at the end of the quarter, compared to $114.9 million at the previous quarter’s end. As of Jun 30, 2016, the company had approximately $253 million of undrawn borrowing capacity under its existing five-year credit agreement.

Additionally, in the second quarter, the company bought back $49.9 million worth of stock. 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 Jun 30, 2016, there is $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 1.5%–3%  (lower from the earlier declared guidance of 2.5%–3.5%). Average Daily Census is estimated to expand approximately 4% to 5%, while Medicare Cap billing limitations are projected at $2.5 million (earlier estimate was $3.8 million). On the other hand, management anticipates full-year 2016 revenue growth of 4%–5% for Roto-Rooter (earlier guidance was 3.5%–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 $7.15–$7.30, for 2016 (earlier guidance was $7.05–$7.25). The current Zacks Consensus Estimate is pegged at $7.17 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 the second-quarter 2016, VITAS had a 25.5/74.5 RHC Days-of-Care ratio and generated approximately $1.0 million in SIA payments. This resulted in 2% less revenue than under the previous Medicare reimbursement methodology.

Our Take

Chemed’s second-quarter 2016 results were a mixed bag with its bottom-line lagging behind the Zacks Consensus Estimate while revenues exceeded the same. Issues related to declining units for admission remains a headwind. However, 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 improved operating results are anticipated in the company’s upcoming quarters and therefore buoys optimism. However, the reduced outlook for 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, competitive landscape and dependence on government mandate continue to be challenges for Chemed.

Zacks Rank

Chemed currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical sector are Boston Scientific Corporation (BSX - Free Report) , NuVasive, Inc. and Lonza Group Ltd (LZAGY - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy).

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