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Chemed Grows on Robust VITAS & Roto-Rooter Despite Headwinds

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On Dec 4, we issued an updated research report on Chemed Corporation (CHE - Free Report) . This Zacks Rank #3 (Hold) stock currently operates two wholly-owned subsidiaries, namely VITAS Healthcare and Roto-Rooter.

Year to date, shares of this Cincinnati, OH-based company have consistently outperformed its industry. The stock has rallied 24.7% versus the industry’s 2.5% decline.

Notably, Chemed exited the third quarter on a solid note with earnings and revenues surpassing the respective Zacks Consensus Estimate. The company’s both subsidiaries once again registered strong sales.

The Roto-Rooter business is showing a steady progress on the back of strong performances by the core plumbing and drain cleaning service segments plus solid growth in water restoration. We are currently looking forward to Roto Rooter’s recently-made acquisition of certain franchises in California. Per the company, it has purchased five formerly independent Roto-Rooter franchises covering several areas of Northern California. This is Roto-Rooter’s largest franchise buyout to date with annual sales of $22 million. Effective Oct 1, 2018 this acquisition is part of Roto-Rooter’s ongoing strategy of acquiring franchises to boost productivity, market share and profitability.

Meanwhile, VITAS registered solid admissions and expanded average daily census.  Over the recent past, Chemed’s VITAS business was in trouble due to certain admission coding changes initiated by the Centers for Medicare & Medicaid Services (CMS). However, management noted that the recent admission trends have been positive and the momentum should continue into the coming quarters.

The expansions in margins also buoy optimism. The raised guidance for 2018 hints at a brighter picture ahead.

However, headwinds like reimbursement related issues, seasonality in business, a competitive landscape and dependence on government mandate pose challenges to Chemed.  Also, a tweaked view for Medicare Cap billing limitations is a matter of concern.

Key Picks

Some better-ranked stocks in the broader medical space are Integer Holdings Corporation (ITGR - Free Report) , Surmodics, Inc. (SRDX - Free Report) and Veeva Systems (VEEV - Free Report) .

Integer has an expected earnings growth rate of 31.2% for the fourth quarter and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Surmodics’ long-term earnings growth rate is projected at 10%. The stock currently carries a Zacks Rank of 2.

Veeva Systems’ long-term earnings growth rate is estimated at 19.3%. The stock is presently a Zacks #2 Ranked player.

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