Should You Keep Chemed Stock in Your Portfolio Now?

Chemed Corporation CHE is primed to grow in the upcoming quarters, backed by the promising prospects of the VITAS business. The company is set to capitalize on the positive trends of the global Hospice industry. Moreover, sound financial stability appears encouraging. However, the uncertainty of the macroeconomic challenges and competitive pressure remain our concerns for Chemed's operations.

In the past year, this Zacks Rank #3 (Hold) stock has dropped 2.2% in value against the 11.5% rise of the industry and the 25% growth of the S&P 500 composite.

The renowned hospice care provider has a market capitalization of $8.14 billion. Chemed projects an estimated earnings growth rate of 17.6% in the second quarter of 2024, driven by an 8.9% increase in revenues. In the trailing four quarters, the company delivered an average earnings surprise of 0.33%.

Let's delve deeper.

Upsides

VITAS' Bright Growth Prospects: The segment's accelerated improvement post-pandemic has been encouraging. The increased growth in licensed healthcare professionals, strong admissions and corresponding growth in the patient census have returned VITAS to normalized operating conditions. In the first quarter of 2024, the year-over-year increase in business revenues was primarily driven by a 2.6 % rise in the geographically weighted average Medicare reimbursement rate and an 11.5% increase in days of care.

Furthermore, VITAS' improving operating metrics are a direct result of its retention and hiring program launched in July 2022. Over the last six quarters, VITAS has generated quarterly sequential ADC (Average Daily Census) growth, increasing by 10.3% year over year in the first quarter. The business also increased its net bedside headcount by 173 licensed professionals, which outpaced its projections.

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Favorable Hospice Industry Trends:  Within the Hospice segment, we believe that Chemed is well-poised to register growth, driven by the growing aging population. As people age, the prevalence of chronic and life-limiting illnesses, such as cancer, heart disease and dementia, also increases. This demographic trend drives the hospice market, creating a greater demand for end-of-life care and supportive services.

Further, growing long-term care services for chronic diseases worldwide, such as COPD and heart failure, are likely to boost companies' growth within the industry. According to a report by Market Data Forecast, the global hospice market is estimated to witness a CAGR of 9.1% between 2023 and 2028.

Strong Solvency and Capital Structure: At the end of the first quarter, Chemed reported cash and cash equivalents of $313.4 million and no current and long-term debt on the balance sheet. This indicates a robust financial position, with the company holding substantial cash in case of an economic downturn.

During the quarter, Chemed also repurchased 50,000 shares of its stock for $32.3 million, which equates to a cost per share of $646.87. As of Mar 31, 2024, there was approximately $281.7 million of remaining share repurchase authorization under its plan. Moreover, the company has a solid track record of dividend payments, with a five-year annualized dividend growth being 5.87%.

Downsides

Macroeconomics Headwinds Weighing on Margins: Chemed has been grappling with macroeconomic challenges like the inflationary trend, increased logistics costs and higher employee-related expenses, which are affecting its margin performance. In the first quarter of 2024, the company's cost of products and services went up by 3.9% from the 2023 comparable period. Added to this, selling, general & administration expenses rose by 15.8% in the same time frame.

Seasonality of the Business Weighs on the Stock: The seasonal dynamics of Chemed's VITAS operations can lead to a fluctuating financial performance, particularly in Florida, where most of the retiree Medicare recipients relocate during the winter months. This generally resulted in higher admissions and revenues concentrated only within Florida during that period. Moreover, Roto-Rooter's revenues and operating results are also impacted by significant weather patterns across the United States.

Estimate Trend

The Zacks Consensus Estimate for Chemed's 2024 earnings per share has remained constant at $23.20 in the past 30 days.

The Zacks Consensus Estimate for the company's 2024 revenues is pegged at $2.44 billion. This suggests a 7.95% rise from the year-ago reported number.

Key Picks

Some better-ranked stocks in the broader medical space are Hims & Hers Health HIMS, Haemonetics HAE and Globus Medical GMED.

Hims & Hers Health's earnings are expected to surge 281.8% in 2024 compared with the industry's 18.8% growth. HIMS' earnings surpassed estimates in three of the trailing four quarters and missed in one, delivering an average surprise of 79.2%. Its shares have surged 151% against the industry's 26% decline in the past year.

HIMS sports a Zacks Rank #1 (Strong Buy) at present.

Haemonetics, carrying a Zacks Rank #2 (Buy) at present, has an estimated fiscal 2025 earnings growth rate of 15.4% compared with the industry's 12.7%. Shares of HAE have increased 2.1% against the industry's 0.8% fall over the past year.

HAE's earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 13.2%. In the last reported quarter, it delivered an earnings surprise of 2.3%.

Globus Medical, carrying a Zacks Rank #2 at present, has an estimated 2024 earnings growth rate of 21.6% compared with the industry's 11.1%. Shares of GMED have rallied 15.6% against the industry's 0.4% fall over the past year.

GMED's earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 10.8%. In the last reported quarter, it delivered an earnings surprise of 30.9%.

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