Acquisition And Florida Expansion Will Strengthen Operational Resilience

Key Takeaways

• Strategic acquisitions and integration, including Covenant Health, bolster Chemed's revenue and EBITDA, driving long-term growth and financial resilience.
  
• Expansion in Florida and enhanced strategies in Roto-Rooter and VITAS support sustained above-average growth in admissions, revenue, and profit margins.
  
• Cash flow challenges, margin pressures, and revenue underperformance at VITAS and Roto-Rooter threaten Chemed's financial stability and long-term growth prospects.

Catalysts

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• The $85 million acquisition of Covenant Health has been successful and is meeting internal financial projections. This acquisition is expected to contribute to future revenue and EBITDA growth as it integrates with Chemed's existing operations.
  
• Expansion initiatives in Florida, including new programs in Pasco and Marion counties, are anticipated to drive further admissions growth. This should positively impact revenue and provide additional Medicare Cap cushion against potential financial constraints.
  
• Roto-Rooter’s enhanced commercial revenue strategy, with a 7.3% increase in revenue driven by a focused sales approach and strategic pricing adjustments, is likely to result in sustained revenue growth despite current pressures on EBITDA margins.
  
• VITAS' ability to manage Medicare Caps and increase hospital-based admissions, which offer shorter stays, provides financial resilience and stabilizes margins. This strategy ensures sustainable growth by adapting to regulatory requirements while optimizing revenue opportunities.
  
• A focus on acquiring and retaining licensed healthcare professionals and the integration of other providers through acquisitions facilitates consistent above-average growth in ADC, revenue, and EBITDA. This talent acquisition strategy supports high operating performance and is a catalyst for long-term growth.

Chemed Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chemed's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.4% today to 13.6% in 3 years time.
• Analysts expect earnings to reach $410.0 million (and earnings per share of $28.46) by about May 2028, up from $308.7 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 25.7x on those 2028 earnings, down from 27.2x today. This future PE is greater than the current PE for the US Healthcare industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 3.38% 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

• Medicare Cap management at VITAS requires focusing on shorter-stay patients, which could limit long-term revenue growth and EBITDA margin expansion. This creates a potential constraint on overall financial performance.
  
• The decline in adjusted EBITDA margin at Roto-Rooter by 108 basis points and a 2.4% decrease in adjusted EBITDA indicate pressure on margins, which could impact overall profitability.
  
• A reduction in revenue from independent contractors by 6.4% at Roto-Rooter highlights an area where revenue growth is underperforming, potentially affecting overall revenue gains.
  
• Price reductions for large commercial excavation jobs at Roto-Rooter, intended to drive revenue growth, resulted in lower margins, indicating a risk of eroding profitability in pursuit of market share.
  
• Cash flow and working capital issues, such as timing differences with PIP payments and significant fluctuations in receivables, could lead to cash flow volatility, impacting liquidity and financial stability.

Valuation

• The analysts have a consensus price target of $677.333 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 $410.0 million, and it would be trading on a PE ratio of 25.7x, assuming you use a discount rate of 6.2%.
• Given the current share price of $576.51, the analyst price target of $677.33 is 14.9% 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.