On Nov 26, 2015, we initiated our coverage on Chemed Corporation CHE.
This Zacks Rank #2 (Buy) company delivered a strong third-quarter 2015, exceeding the Zacks Consensus Estimate of both earnings and revenues. Despite issues related to admission coding changes, we are encouraged by the strong segmental performances witnessed at the company.
Chemed’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, this growth was primarily the result of the company's decision to materially expand into the water restoration service segment. Water restoration is a remediation service that involves removing water and excess humidity from a home or business – often a result of flooding. The company expects water restoration to be a significant contributor to Roto-Rooter's revenue growth and is optimistic about achieving full year 2015 revenue growth of 6% to 7%.
We are also impressed with Chemed’s sound capital deployment policy that allows it to return value to investors through share buybacks and dividend. Nonetheless, headwinds like seasonality in business, competitive landscape and dependence on government mandate are intimidating.
Key Picks from the Sector
Some other stocks worth considering in the broader medical sector are AmSurg Corp. AMSG, Foundation Healthcare, Inc. FDNH and LHC Group, Inc. LHCG. All the three stocks carry a Zacks Rank #1 (Strong Buy).
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