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Here's Why You Should Add Chemed (CHE) to Your Portfolio Now

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Chemed Corporation (CHE - Free Report) has been gaining from robust segmental and international growth. The company’s segmental prospects as well as 2021 guidance are expected to further drive its rally. However, reimbursement headwinds and business seasonality remain concerns.

Over the past year, shares of the Zacks Rank #2 (Buy) company have declined 10.2% compared with the industry’s 26.4% decline.

Per our Style Score, Chemed has a Growth Score of A, which is reflective of its solid long-term growth prospects. Our research shows that stocks with a Growth Style Score of A or B combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best upside potential.

The renowned hospice care provider has a market capitalization of $7.19 billion. The company projects 7.5% growth for the next five years and expects to maintain its strong segmental performance. Further, it surpassed earnings estimates in three of the trailing four quarters, delivering a surprise of 7.7%, on average.

Let’s delve deeper.

Key Growth Catalysts

Q2 Results Impressive: We are upbeat the company’s better-than-expected results for the second quarter of 2021. We are also optimistic about its solid revenue growth across Roto-Rooter. Expansion of both margins is another upside. Full-year strong projection for Roto Rooter revenues buoys optimism. Chemed exited the second quarter of 2021 with no long-term debt on its balance sheet, which is again a positive. Further, the company raised its earnings guidance for 2021. The company’s revised 2021 earnings per share estimate is also above the Zacks Consensus Estimate.

Zacks Investment ResearchImage Source: Zacks Investment Research

VITAS Segment Holds Potential: Chemed has been registering strong performance from VITAS business over the past few quarters. The hospital-generated admissions increased 2.4% in the second quarter, indicating that hospital referrals are gradually returning to pre-pandemic levels. The total VITAS admissions recorded a slight improvement compared to the second quarter of 2020 admissions. The company’s updated guidance anticipates steady improvement in the senior housing referred hospice admissions in the second half of 2021.

Expansion of Roto-Rooter Continues: Roto-Rooter is currently the nation’s leading provider of plumbing, drain cleaning service and water restoration, providing services to more than 90% of the population in the United States. In the second quarter, the segment surged 26.1% year over year. Management believes Roto-Rooter is well positioned for growth post-pandemic 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, 24/7 call centers and Internet presence.

Raised Guidance: We are upbeat about the raised Roto-Rooter and earnings guidance for 2021. Roto-Rooter is forecast to achieve 2021 revenue growth of 15% to 15.5% (up from the previous guidance of 5-6%). Full-year 2021 adjusted earnings per share are estimated in the range of $18.20 to $18.50, higher than the February-announced guidance of $17.00 to $17.50.

However, despite strong upside potential of the company, its top-line growth might get affected by reimbursement headwinds. The Centers for Medicare & Medicaid Services (CMS) has modified the Medicare hospice reimbursement per diem system, which is expected to be a major headwind for the company.

Apart from that, business seasonality has been affecting the company, as a major portion of the VITAS business operates in Florida. As majority of Chemed’s patients are Medicare recipients, retirees relocating to Florida during the winter months generally result in higher admissions and revenues concentrated only within Florida during that period.

Estimate Trend

Chemed is witnessing a positive estimate revision trend for 2021. Over the past 90 days, the Zacks Consensus Estimate for its earnings has moved 2.2% north to $18.42.

The Zacks Consensus Estimate for the company’s third-quarter 2021 revenues is pegged at $532.2 million, suggesting a 0.7% rise from the year-ago reported number.

Other Key Picks

A few similar-ranked stocks from the broader medical space are Envista Holdings Corporation (NVST - Free Report) , BellRing Brands, Inc. (BRBR - Free Report) and Bio-Rad Laboratories, Inc. (BIO - Free Report) , each carrying a Zacks Rank #2. You can see the complete list of Zacks #1 Rank stocks here.

Envista Holdings has an estimated long-term earnings growth rate of 27%.

BellRing Brands has an estimated long-term earnings growth rate of 29%.

Bio-Rad has a projected long-term earnings growth rate of 35%.

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