VITAS's Expansion In Florida Will Tap Favorable Demographics In Retirement Communities

Key Takeaways

• The acquisition of Covenant Health and Florida expansion are driving significant growth and revenue projections for VITAS, leveraging demographic advantages.
  
• Roto-Rooter's innovations and conversion improvements aim to reverse revenue declines and enhance earnings potential in residential services.
  
• Medicare Cap limitations and insurance reimbursement challenges may dampen growth and profitability, affecting both VITAS and Roto-Rooter revenue and margins negatively.

Catalysts

Provides hospice and palliative care services to patients through a network of physicians, registered nurses, home health aides, social workers, clergy, and volunteers primarily in the United States.

• The acquisition of Covenant Health in April 2024 is positively impacting VITAS's admissions and average daily census, contributing to significant revenue growth and is expected to continue meeting financial projections, impacting future revenue and earnings positively.
  
• Expansion in Pasco and Marion Counties, Florida, introduces new growth opportunities for VITAS, expected to bolster future revenue streams due to favorable demographic factors in prominent retirement communities.
  
• Roto-Rooter's commercial initiatives, such as using cameras to enhance sewer drain cleaning and increasing excavation work, are gaining momentum, expected to drive revenue growth and aid in reversing the downward trend in residential revenue.
  
• The improvement in conversion rates, particularly in residential water restoration at Roto-Rooter, signifies potential for increasing net margins by effectively turning calls into paying jobs, which could enhance earnings in the future.
  
• Addressing Medicare Cap limitations and managing the acuity mix at VITAS involves strategies that moderate revenue and margin growth but focus on sustainable, long-term financial performance, impacting earnings stability.

Chemed Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chemed's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.4% today to 13.5% in 3 years time.
• Analysts expect earnings to reach $400.9 million (and earnings per share of $27.43) by about April 2028, up from $302.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.2x on those 2028 earnings, down from 27.7x today. This future PE is greater than the current PE for the US Healthcare industry at 23.4x.
• Analysts expect the number of shares outstanding to decline by 2.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Chemed Future Earnings Per Share Growth

Risks

• Chemed faces potential headwinds due to Medicare Cap limitations at VITAS, which could moderate their revenue growth and impact EBITDA margins across impacted programs.
  
• Roto-Rooter's revenue declined by 2.9% in the fourth quarter of 2024 and the guidance assumes that the decline seen in the residential business will not continue, presenting a risk if the residential sector struggles persistently, potentially impacting overall revenue.
  
• There is continued pressure on Roto-Rooter's adjusted EBITDA margins, which saw a decline in the fourth quarter of 2024. If cost management doesn't improve, it could negatively affect profitability.
  
• The growth of VITAS is contingent on the ability to secure new admissions, specifically hospital-based ones to manage Medicare Cap issues, which might lead to lower growth and margins if not effectively balanced, impacting overall earnings.
  
• The competitive environment and changing insurance reimbursement rates are areas of concern. Unfavorable developments could reduce revenue and profitability, particularly in the VITAS segment where growth is highly dependent on favorable reimbursement conditions.

Valuation

• The analysts have a consensus price target of $675.0 for Chemed based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.0 billion, earnings will come to $400.9 million, and it would be trading on a PE ratio of 26.2x, assuming you use a discount rate of 6.2%.
• Given the current share price of $571.76, the analyst price target of $675.0 is 15.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.