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Here's Why You Should Retain Chemed (CHE) Stock For Now

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Chemed Corporation (CHE - Free Report) is gaining from strong demand for plumbing, drain cleaning service and water restoration services in the Roto-Rooter business. The ongoing rebound in senior housing admissions continues to favor the VITAS segment. A strong solvency position is another plus. However, stiff rivalry and pandemic-led headwinds do not bode well.

In the past year, the Zacks Rank #3 (Hold) stock has gained 6.2% against a 37.1% plunge of the industry and a 18.7% drop of the S&P 500.

The renowned hospice care provider has a market capitalization of $7.37 billion. Its earnings beat estimates in all the trailing four quarters, the average surprise being 6.8%.

In the past five years, the company registered earnings growth of 24.5% compared with the industry’s 13.2% rise and the S&P 500’s 13.4% increase. The company projects 8.5% growth for the next five years compared with the industry and the S&P 500’s projected growth rate of 14.3% and 11.2%, respectively.

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Image Source: Zacks Investment Research

Let’s delve deeper.

Factors at Play

Roto-Rooter Continues to Expand: Roto-Rooter’s revenues surged 9.4% year over year in the first quarter. The business witnessed continued demand for plumbing, drain cleaning services and water restoration services in the quarter under review. Total branch commercial revenues increased 14.4%, whereas total Roto-Rooter branch residential revenues registered growth of 7.2% on a year-over-year basis, respectively.

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 and 24/7 call centers and Internet presence.

VITAS Prospects Bright: VITAS, a major provider of end-of-life care, recorded a 1.7% sequential admission improvement to 16,530 in the first quarter. Chemed’s latest admission data suggested that senior housing is in the process of stabilization and recovery. The company’s 2022 outlook also anticipates an acceleration in senior housing admissions throughout 2022.

Strong Solvency: Chemed exited the first quarter with cash and cash equivalents of $18.2 million. Long-term debt at Q1 2022-end was $120 million, higher than the current cash and cash equivalents level. However, the company did not report any short-term payable debt on its balance sheet, implying that the solvency level of Chemed is pretty promising.


Pandemic-Related Challenges:  In the first quarter, Chemed’s average daily census was 17,313 patients, a decline of 4.1% year over year. Per management, this decline directly resulted from pandemic-related disruptions across the entire health care system. The VITAS segment also continued to be challenged by pandemic-related issues, including health care labor shortages, disruption in senior housing occupancy and related hospice referrals.

Tough Competitive Landscape: Chemed faces intense competition from local and regional firms across its sewer, drain and pipe cleaning and plumbing repair businesses. Further, as the hospice care industry is highly fragmented, VITAS competes with a large number of organizations on the basis of its ability to deliver quality, responsive services.

Seasonality Headwinds: A substantial portion of VITAS admissions and revenues is concentrated only within Florida, as retirees often tend to relocate to the state during winter. Besides, the Roto-Rooter’s revenue and operating results are also impacted by weather patterns across the United States.

Estimate Trend

The Zacks Consensus Estimate for Chemed’s second-quarter 2022 earnings is pegged at $4.78, indicating an increase of 3.9% from the year-ago figure. The company is scheduled to report second-quarter results on Jul 27, after the closing bell.

The Zacks Consensus Estimate for the company’s second-quarter 2022 revenues is pegged at $538.1 billion, suggesting a 1.1% rise from the year-ago reported number.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are AMN Healthcare Services, Inc. (AMN - Free Report) , Patterson Companies, Inc. (PDCO - Free Report) and Merck & Co., Inc. (MRK - Free Report) .

AMN Healthcare has a long-term earnings growth rate of 1.1%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.6%, on average. It currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry in the past year. AMN has gained 13.4% against the industry’s 46% fall.

Patterson Companies has an estimated long-term growth rate of 9.6%. The company’s earnings surpassed estimates in all the trailing four quarters, the average beat being 16.5%. It currently flaunts a Zacks Rank #2 (Buy).

Patterson Companies has outperformed its industry in the past year. PDCO has gained 1% compared with the industry’s 11.8% fall in the past year.

Merck has a long-term earnings growth rate of 10.1%. The company surpassed earnings estimates in the trailing three quarters and missed in one, delivering a surprise of 13.4%, on average. It currently carries a Zacks Rank #2.

Merck has outperformed its industry in the past year. MRK has gained 22.3% against the industry’s 14.9% growth.

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