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Key Takeaways
- Strategic acquisitions, such as Covenant Health, and aggressive hiring in VITAS are poised to enhance Chemed's revenue and net margins through improved operational efficiency.
- Initiatives to boost Roto-Rooter's commercial sector and the expansion into new markets, like Pasco County, underscore efforts to reverse revenue decline and foster future growth.
- Challenges in Roto-Rooter's operational sectors and VITAS's hiring may significantly affect Chemed's revenue growth and market share.
Catalysts
About Chemed- 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 is expected to contribute significantly to VITAS' revenue and net income, highlighting the company's strategic growth through acquisitions. This could impact future revenue and net margins positively due to the higher overall margins for the programs acquired.
- Chemed's aggressive push to expand VITAS' hiring and retention of licensed healthcare professionals, ensuring a continued increase in admissions and average daily census, directly influences future revenue growth and operational efficiency, potentially improving net margins.
- The Certificate of Need awarded to VITAS for hospice services in Pasco County, Florida, presents a new market opportunity for expansion. While not forecasted to significantly impact 2024, it lays the groundwork for future revenue growth.
- Roto-Rooter's initiatives to enhance its commercial sector, including targeted improvement programs and enhanced customer relationship management capabilities, aim to reverse the recent revenue decline. If successful, these efforts could lead to revenue growth and margin improvement in the plumbing segment.
- Chemed's revised full-year 2024 guidance, which includes a substantial increase in VITAS' expected revenue growth and a moderated decline in Roto-Rooter's revenue, suggests management's confidence in operational improvements and strategic acquisitions to drive future growth, potentially making the stock undervalued based on these forward-looking growth catalysts.
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Chemed's revenue will grow by 7.2% annually over the next 3 years.
- Analysts assume that profit margins will shrink from 12.9% today to 0.2% in 3 years time.
- Analysts expect earnings to reach $438.2 million (and earnings per share of $28.8) by about August 2027, up from $300.9 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 25.9x on those 2027 earnings, down from 28.5x today. This future PE is lower than the current PE for the US Healthcare industry at 26.7x.
- Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
- To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.
Risks
What could happen that would invalidate this narrative?- The decline in Roto-Rooter's quarterly revenue and call volume could negatively affect the company's revenue growth and profitability.
- The competitive pressures in internet marketing and job leads, especially within the residential sector, could impact Roto-Rooter's ability to maintain or grow its market share, affecting overall revenue.
- The slow pace of reestablishing successful commercial business practices post-pandemic in some locations might delay the anticipated recovery of the commercial segment, potentially impacting future earnings.
- The necessity for multiple quarters to effectuate changes and improvements in Roto-Rooter's commercial sector could result in prolonged periods of underperformance, affecting near-term profitability and revenue growth.
- Relying on the ability to accelerate hiring and retain licensed healthcare professionals for VITAS’s growth may pose a risk if the competitive job market hinders these efforts, potentially affecting the company’s service capacity and revenue growth.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $685.0 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 2027, revenues will be $2.9 billion, earnings will come to $438.2 million, and it would be trading on a PE ratio of 25.9x, assuming you use a discount rate of 5.8%.
- Given the current share price of $572.37, the analyst's price target of $685.0 is 16.4% 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.
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Disclaimer
Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.