Why Is Chemed (CHE) Down 28.5% Since Last Earnings Report?

It has been about a month since the last earnings report for Chemed (CHE). Shares have lost about 28.5% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Chemed due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Chemed Q4 Earnings & Revenues Beat Estimates, Margins Up

Chemed Corporation reported fourth-quarter 2019 adjusted earnings per share of $4.22, up 25.9% year over year. The figure beat the Zacks Consensus Estimate by 2.2%.

The company’s GAAP (reported) earnings was $3.96, up 21.5% year over year.

Full-year adjusted earnings was $13.31, reflecting an 8.8% increase from the year-ago period. However, the company lagged the Zacks Consensus Estimate of $13.86.

Revenues in Detail

Revenues in the reported quarter improved 14.2% year over year to $522.3 million, which beat the Zacks Consensus Estimate by 0.6%.

Yearly revenues were $1.94 billion, reflecting an 8.7% increase from a year ago. However, the metric was in line with the Zacks Consensus Estimate.

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 fourth quarter, net revenues at VITAS totaled $339.9 million, reflecting rise of 10.7% year over year. The top-line improvement was driven by a 5.5% increase in geographically weighted average Medicare reimbursement rate, 6.1% rise in days-of-care and a rise in Medicare Cap billing limitation that dented revenue growth by 0.3%. However, revenue growth was partially offset by acuity mix shift, fluctuations in net room and board and contractual adjustments, the combination of which led to a revenue decline of 0.7% from the prior-year quarter.

Roto-Rooter reported sales of $182.4 million in the fourth quarter, reflecting growth of 21.2% 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 $162 million for the fourth quarter of 2019 (a year-over-year increase of 7.9%).

Per the company, total commercial revenues (including acquisitions) registered growth of 26.4% on 34.9% rise in drain cleaning revenues, and 25.2% improvement in commercial plumbing and excavation. However, commercial water restoration revenues declined 8.8%.

Total residential revenues (including acquisitions) registered growth of 19.4% on a 25.5% rise in residential drain cleaning revenues, an 18.1% improvement in plumbing and excavation, and a 16.3% increase in residential water restoration.

Margin in Detail

Gross profit rose 20.3% year over year to $174.9 million in the fourth quarter of 2019. Gross margin expanded 171 basis points (bps) year over year to 33.5%.

Adjusted operating profit grew 16.5% from the year-ago period to $91.7 million. Moreover, the adjusted operating margin expanded 35 bps to 17.6% on 24.8% escalation in adjusted operating expenses.

Operational Update

Chemed exited the year with cash and cash equivalents of $6.2 million, marking a significant improvement from $4.8 million at the end of 2018. The company had long-term debt of $90 million at the end of 2019, which increased from $89.2 million at the end of 2018. During the fourth quarter, it repurchased shares worth $20.7 million.

At the end of 2019, cash flow from operating activities was $301.2 million compared with $287.1 million at the end of 2018.

Guidance

For 2020, Chemed expects revenue growth of 8.5-9.5% for VITAS (prior to Medicare Cap). Admissions and Average Daily Census in 2020 are expected to grow 3.5-4.5%, whereas High acuity days-of-care are projected at 4.1% of total 2020 days-of-care. It expects to witness $18-million billing limitations for Medicare Cap in 2020.

Chemed expects revenue growth of 13-14% for Roto-Rooter in 2020. The projection is based on unit-for-unit revenue growth of 4-5% in core plumbing and drain cleaning services, and continued but slowing revenue growth in water restoration services combined with 12 months of revenues in the Oakland and HSW acquisitions.

For 2020, the company anticipates adjusted earnings (excluding adjustments like non-cash expenses for stock options and tax benefits from stock options) of $16.20-$16.50. The Zacks Consensus Estimate for the same is pegged at $15.67.

How Have Estimates Been Moving Since Then?

Estimates revision followed an upward path over the past two months.

VGM Scores

At this time, Chemed has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Chemed has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.