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Chemed (CHE) Q2 Earnings Beat Estimates, Margins Decline

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Chemed Corporation (CHE - Free Report) reported second-quarter 2020 adjusted earnings per share (EPS) of $4.41, up 31.3% year over year. The figure beat the Zacks Consensus Estimate by 16.4%.

The company’s GAAP EPS was $5.01, up 62.7% year over year.

Revenues in Detail

Revenues in the reported quarter improved 6% year over year to $502.2 million but lagged the Zacks Consensus Estimate by 1.4%.

Segmental Details

Chemed operates through two wholly-owned subsidiaries, namely VITAS (a major provider of end-of-life care) and Roto-Rooter (a leading commercial and residential plumbing plus drain cleaning service provider).

In the second quarter, net revenues at VITAS totaled $327 million, reflecting a rise of 4.7% year over year. The top-line improvement was driven by a2.8% increase in days of care, a5.4% increase in geographically weighted average Medicare reimbursement rate (considering the suspension of sequestration on May 1, 2020), andacuity mix shift that reduced the blended average Medicare rate by approximately 310 basis points. However, increase in Medicare Cap, decline in Medicaid net room and board pass through and other contra revenue activity had 42-basis points adverse impact on revenue growth.

Chemed Corporation Price, Consensus and EPS Surprise

Chemed Corporation Price, Consensus and EPS Surprise

Chemed Corporation price-consensus-eps-surprise-chart | Chemed Corporation Quote

Roto-Rooter reported sales of $174.7 million in the second quarter, reflecting growth of 8.6% year over year. On a unit-for-unit basis, excluding the Oakland and HSW acquisitions completed in July and September 2019, the segment registered revenues of $158 million in the second quarter (a year-over-year increase of 1.9%).

Per the company, total commercial revenues (excluding acquisitions) registered growth of 29.1% on 31.2% rise in drain cleaning revenues, and 28% improvement in commercial plumbing and excavation. However, commercial water restoration revenues declined 20.3%.

Total residential revenues (excluding acquisitions) registered growth of 10.4% on 10.2% rise in residential drain cleaning revenues, a 14.4% improvement in plumbing and excavation, and a 4.3% increase in residential water restoration.

Margin in Detail

Gross profit edged up 0.1% year over year to $150 million in the second quarter of 2020. Gross margin contracted 179 basis points (bps) year over year to 29.9% on 8.8% rise in cost of products and services.

Adjusted operating profit declined 16.4% from the year-ago period to $84.5 million. Adjusted operating margin contracted 351 bps to 13% on an 18.1% rise in adjusted operating expenses.

Operational Update

Chemed exited the second quarter of 2020 with cash and cash equivalents of $20.4 million compared with $28.9 million at the end of the first quarter. There was no long-term debt at the end of second-quarter 2020 compared with $160 million at first quarter-end. In the second quarter, Chemed’s management repurchased stocks for $21.9 million. As of Jun 30, 2020, there was approximately $232 million of share repurchase remaining under the existing plan.

Cumulative net cash provided by operating activities at the end of the second quarter was $277.8 million compared with $108.9 million a year ago.

Guidance

In 2020, revenue growth for VITAS (prior to Medicare Cap) is estimated to be in the range of 5% to 7%. Average daily census in 2020 is estimated to expand in the band of 2% to 4%. Roto-Rooter revenue growth is expected in the range of 9% to 10%.

Full-year adjusted EPS is estimated in the range of $16.20 to $16.40.

Our Take

Chemed ended the second quarter of 2020 on a mixed note with better-than-expected earnings but lower-than-expected revenues. Notably, the company witnessed solid revenue growth across both key subsidiaries.

However, the revenue miss and contraction in both margins in the quarter are concerning. Reimbursement hampering top-line growth, business seasonality and a tough competitive landscape are other concerns.

Zacks Rank & Key Picks

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

Some better-ranked stocks in the broader medical space are West Pharmaceutical Services, Inc. (WST - Free Report) , Thermo Fisher Scientific Inc. (TMO - Free Report) and Laboratory Corporation of America Holdings (LH - Free Report) or LabCorp. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

West Pharmaceutical reported second-quarter 2020 adjusted EPS of $1.25 in contrast to the Zacks Consensus Estimate of a loss of 91 cents. Net revenues of $527.2 million outpaced the consensus estimate by 6.9%.

Thermo Fisher reported second-quarter 2020 adjusted EPS of $3.89, beating the Zacks Consensus Estimate by 45.7%. Revenues of $6.92 billion outpaced the consensus mark by 0.1%.

LabCorp reported second-quarter 2020 adjusted EPS of $2.57, surpassing the Zacks Consensus Estimate of 78 cents. Revenues of $2.77 billion outpaced the consensus mark by 14.3%.

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