On Apr 14, 2015, we initiated our coverage on Chemed Corporation CHE. Chemed currently combines a favorable Zacks Rank #1 (Strong Buy) with the highly desirable Zacks Growth Style Score of ‘A’ and a Zacks Value Style Score of ‘B’.
Chemed delivered strong fourth-quarter 2014 results bettering the year-ago numbers for both earnings and revenues. Despite issues related to admission coding changes, we are encouraged by the year-over-year sales growth, primarily on the back of balanced segmental performances.
The company’s VITAS business had been in trouble over the past few quarters due to certain admission coding changes initiated by the Centers for Medicare & Medicaid Services (CMS). However, the company seems to have resolved the issues now and has successfully brought the segment back on its growth trajectory.
We are also impressed with the performance of the Roto-Rooter business. According to Chemed, 2014 was a record year for the Roto-Rooter business, where expanded full year revenues grew a decent 6.5% to $392 million. Roto-Rooter utilizes a universal calendar of four 13-week quarters equating to a 52-week full year reporting period. Although in the fourth quarter of 2014, Roto-Rooter had 14 weeks of operating activity, even after excluding the impact from the net result of the universal calendar true up, revenues increased 10.7% year over year in the reported quarter. On a unit-per-unit basis, Roto-Rooter’s commercial drain cleaning revenues increased 14.5%, and commercial plumbing and excavation climbed 10.5%.
Residential plumbing and excavation revenues increased 9.7% and residential drain cleaning revenues were up 8.4%. Overall, unit-per-unit residential sales rose 21%. The company is optimistic that this healthy trend will continue even in 2015.
Chemed’s capital deployment policy is grounded on suitable acquisitions and return of cash to shareholders through dividends and share buybacks. For full year 2014, the company repurchased $110 million worth of shares at an average cost of $93.01 and is left with $11.8 million of authorization under its current share repurchase plan. Further, in Mar 2015, the board of directors authorized an additional $100 million for buyback under Chemed’s existing share repurchase program.
Key Picks from the Sector
Some other top-ranked stocks in the broader medical sector are Addus HomeCare Corporation ADUS, Almost Family Inc. AFAM and LHC Group, Inc. LHCG. All of these three stocks carry the same Zacks Rank as Chemed.
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