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Chemed (CHE) Misses Q4 Earnings, Sales; Offers ’17 View


Chemed Corp.’s CHE fourth-quarter 2016 adjusted earnings per share (EPS) was $2.02 (considering stock option expense as a regular expenditure), missing the Zacks Consensus Estimate by 4.3% but ahead of the year-ago adjusted number by 6.3%.

Including one-time items, the company reported fourth-quarter net earnings of $1.99 per share, up 11.8% from the year-ago period.

Quarter in Details

Revenues in the quarter increased 1.2% year over year to $403.5 million, missing the Zacks Consensus Estimate of $409 million.

Chemed Corp. Price, Consensus and EPS Surprise

Chemed Corp. Price, Consensus and EPS Surprise | Chemed Corp. Quote

Chemed currently operates in the form of two wholly-owned subsidiaries viz. VITAS Healthcare Corporation – a major provider of end-of-life care and Roto-Rooter – a leading commercial and residential plumbing and drain cleaning services provider.

In the fourth quarter, net revenue at VITAS reached $284 million, down 0.1% year over year. The decline primarily resulted from a 2.1% rise in average Medicare reimbursement rate and a 2.9% increase in average daily census, offset by acuity mix shift which negatively impacted revenues by 1.9%. The recent alteration in the Medicare hospice reimbursement methodology also impacted revenue growth by 2.3%.

Roto-Rooter reported sales of $119 million in the fourth quarter, up 4.5% year over year. According to the company, revenues from water restoration increased 31.7% year over year to $13.7 million.

Gross margin expanded 7 basis points (bps) year over year to 30.8%. Adjusted operating margin expanded 77 bps to 15.3% in the quarter, on 3.1% rise in selling, general and administrative expenses to $62.5 million.

Chemed exited 2016 with total cash and cash equivalents of $15.3 million, up 4.1% from $14.7 million at the end of 2015. The company had total debt of $108.8 million at the end of the year, compared with $91.3 million at 2015 end. As of Dec 31, 2016, the company had approximately $287 million of undrawn borrowing capacity under its existing five-year credit agreement.

On Mar 11, 2016, Chemed’s board of directors authorized an additional $100 million for stock repurchase under the company’s existing share repurchase program. As of Dec 31, 2016, the company had $50.2 million of remaining share repurchase authorization under this plan.

2017 Outlook

On Jan 1, 2016, CMS implemented a revenue neutral rebasing to the Medicare hospice reimbursement per diem. Including the impact of rebasing, Chemed currently expects full-year 2017 revenue growth for VITAS (prior to Medicare Cap) in the range of 4–5%. Average Daily Census is estimated to expand approximately 3% to 4% while Medicare Cap billing limitations are projected at $5 million.

On the other hand, management anticipates full-year 2017 revenue growth of 3–4% for Roto-Rooter.

Including the impact of rebasing, the company expects to deliver adjusted EPS (considering stock option expense as a one-time item) in the range of $7.80–$8.00 for 2017.

Reimbursement-Related Update

CMS’ implementation of a refinement to the Medicare hospice reimbursement per diem eliminated the single-tier per diem for routine home care (RHC) and replaced it with a two-tiered rate, with a higher per diem rate for the first 60 days of a hospice patient’s care, and a lower rate for day 61 and after. In addition, CMS provided for a Service Intensity Add-on (SIA) payment, which provides for reimbursement of care provided by a registered nurse or social worker for RHC patients within seven days prior to death.

The current two-tiered national per diem rate for RHC is $190.41 for the first 60 days and $149.68 for RHC provided to patients in hospice beyond 60 days. An individual hospice’s actual per diem rate is adjusted for differences in geographic cost of living.

Rebasing in 2016 would be revenue neutral to a hospice if it has 37.6% of total RHC days-of-care being provided to patients in their first 60 days of admission and 62.4% of total RHC days-of-care provided to patients after the 60days.

Our Take

Chemed’s fourth-quarter 2016 results were disappointing, with its top line and bottom-line results lagging the Zacks Consensus Estimate. Issues related to declining units for admission remain a headwind. VITAS demonstrated a dull quarter, but we are optimistic about the outlook for both the Vitas and the Roto-Rooter segment. We are also encouraged by the strong bottom-line expectations, indicating improvement in operating results down the line.

However, headwinds like reimbursement related issues, seasonality in business, a competitive landscape and dependence on government mandate continue to be challenges for Chemed.

Zacks Rank & Key Picks

Chemed currently has a Zacks Rank #3 (Hold). Better-ranked medical stocks include Glaukos Corporation GKOS, Cardiovascular Systems CSII and Neogen Corp. NEOG. Glaukos sports a Zacks Rank #1 (Strong Buy) while Cardiovascular Systems and Neogen carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Glaukos gained over 100% in the last one year compared with the S&P 500’s gain of 21.9%. The company has a stellar four-quarter average earnings surprise of over 100%.

Cardiovascular Systems surged over 100% in the last one year compared with the S&P 500. It has a four-quarter average earnings surprise of 67.8%.

Neogen gained 33.8% in the past one year, better than the S&P 500 mark. The stock has an impressive long-term earnings growth rate of 16.7% for the next five years compared with the industry average of 15.2%.

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