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Chemed Corp: Hospice Care & Drain Cleaning – Perfect Together?

April 28, 2008 | About:
Hospice Care & Drain Cleaning – Perfect Together?

Chemed Corp [NYSE:CHE] April 25 close: $32.75

52-week range: $29.94 (Apr. 25, 2008) - $71.29 (Jul. 12 2007)

Yield = 0.73%

Chemed (formerly named Roto-Rooter) still operates that leading provider of plumbing and drain cleaning services as well as VITAS Healthcare, which helps terminally ill patients in their final days. VITAS represented 69.6% and Roto-Rooter 30.4% of revenues in the latest quarter.

Chemed shares touched near 4-year lows on Friday after they announced basically flat earnings per share for the March quarter and lowered full year 2008 guidance from $3.48 to $3.05 - $3.20. From an all-time high of $71.30 set last July Chemed shares have sunk by 54% to finish last week at $32.75.

Was that huge drop justified? Even the low-end of the company’s new estimate would be a new record for EPS and CHE shares now trade at just < 10.8x that $3.05 already reduced estimate. That’s the lowest P/E on these shares in over 16 years.

Check out the numbers for the past five years:

Year……Sales/Sh.……..EPS……Ave. P/E.…CF/Sh…..P/Book Val……..ROE

2007…….$48.85……...$3.04………22.2……$4.19……....3.67x………..17.2%

2006…….$45.90…..…...$2.16….....21.4……$3.09……....2.27x………..13.7%

2005…….$35.31……...$1.95………29.9……$2.77……....3.36x…………9.4%

2004…….$29.09……...$0.78………35.2……$1.48………2.53x…………5.7%

2003…….$15.53……...$0.61………29.8……$1.23………2.38x…………5.8%

• Sources: MSN Money Central & Value Line

How many companies can you think of that have posted those kind of growth numbers yet trade at under 11x this year’s earnings?

Chemed shares sold off sharply from March of 2006 through October that year with the share price plunging from $61.90 to $29.80. Earnings that year ended up in record territory and the shares rebounded by 139% to $71.30 in under a year.

At the 2006 low CHE shares were trading for 13.8 times that year’s final earnings. The shares are even cheaper today on a valuation basis.

Some well respected value-oriented managers held positions in CHE at year-end 2007:

(As of December 31, 2007 Chemed shares were still at $55.88)

Iridian Asset Mgt. owned 7.65%

BAMCO held 6.62%

Barclays Global Inv. had 5.29%

Vanguard Group owned 4.34%

J.P. Morgan Chase held 3.45%

State Street had 2.62%

GAMCO owned 2.56%

What would be a reasonable 12-month target price?

Even 17 times the $3.05 new estimate brings me to $51.85 or plus 58%. Just 2.2 times estimated year-end book value of $18.15 suggests $40.48 or up 23.6%. A lower than typical price/sales of 0.9x projected revenues of $48/share gets me to a goal price of $43.20 or + 31.9% from today’s quote.

Is $43 or so achievable? It may actually be way too conservative. Chemed shares have traded between $54.20 and $71.30 at their peaks in each of the last three years. The current share price is lower than the low of $35.40 for all of ultra-turbulent 2007. The exact low was $32 in 2005 when earnings were $1.95 versus last year’s $3.04.

It looks to me like last week’s sell-off created a nice buying opportunity.

I see 25% - 50% upside with what seems to be low risk. You get two nice industry leading businesses at one low price.

Perhaps owning Chemed shares will make your financial worries go right down the drain.


Dsiclosure: Author recently bought shares of CHE.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.3/5 (23 votes)

Comments

DaveinHackensack
DaveinHackensack - 6 years ago
You couldn't resist a cheesy title -- even when writing about a company that provides care for the dying?

FWIW, Chemed is a Magic Formula top-50 stock.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
http://seekingalpha.com/article/28067-chemed-corp-major-player-in-hospice-and-plumbing

The link above is for an article by Zack's from about a year ago.

They valued Chemed back then at 22x projected earnings.
yhlbb
Yhlbb - 6 years ago
Almost pulled the trigger when CHE was selling close to $30 last week. It's on my watch list.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Chemed Corporation Holds Annual Stockholders' Meeting; Board Declares Quarterly Dividend

Monday May 19, 4:12 pm ET


CINCINNATI--(BUSINESS WIRE)--Stockholders of Chemed Corporation (NYSE:CHE - News) today elected a slate of 12 directors at the company’s 2008 annual stockholders’ meeting.

Dividend Declared

Following the stockholders’ meeting, Chemed’s Board of Directors declared a quarterly cash dividend of 6 cents per share on the company’s capital stock, payable on June 11, 2008, to stockholders of record May 29, 2008.

This represents the 148th consecutive quarterly dividend paid to shareholders in Chemed’s 37 years as a public company.


Listed on the New York Stock Exchange and headquartered in Cincinnati, Ohio, Chemed Corporation (www.chemed.com) operates two wholly owned subsidiaries: VITAS Healthcare and Roto-Rooter. VITAS is the nation's largest provider of end-of-life hospice care, and Roto-Rooter is the nation’s leading provider of plumbing and drain cleaning services.

Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
Chemed has already surpassed my conservative target price.

I am selling covered calls on my holdings.
DaveinHackensack
DaveinHackensack - 5 years ago
Congrats on this one.

Are you only going to be posting updates on the stocks you've recommended that have gone up since you recommended them? Ruth's Chris posted its 10Q on August 6th. Any thoughts on it? Anything on the income statement that surprised you?
Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
Dave,

I was wondering why you didn't like Frontier Oil [FTO] anymore when it went into the $17's. You seemed to love it around $28 - $30.

I finally thought it was cheap enough to buy when it went that low and picked up quite a nice position. Now I've been selling calls at great prices for the $22.50 and $25.00 strikes.
DaveinHackensack
DaveinHackensack - 5 years ago
I take it from your non-answer that you haven't even read Ruth's Chris's 10Q.

Regarding FTO, I don't recall saying I didn't like the company. Do you have a link to a post where I wrote that?

As a pure-play refiner, its stock declined as crude oil prices rose faster than the prices of refined products. Going into the summer driving season, I expected gas prices would catch up to rise in crude. I was wrong (it's not so hard to type those three words -- you ought to try it sometime).

FTO is still the best of of the pure-play refiners, and I continue to hold it as a hedge against a further decline in the price of oil. If oil corrects far enough, FTO will go up and I'll sell it and invest the proceeds in an oil E&P.

Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
MONDAY, MAY 25, 2009

Barrons



Chemed: Strange Bedfellows, Attractive Price

By KOPIN TAN

Chemed is an old combination of hospice care and plumbing -- but not forever, and maybe not for long. A breakup could benefit shareholders.



CHEMED HAS AN IDENTITY CRISIS. IT'S A diversified conglomerate with an un-conglomerate-like market cap of just $863 million. It runs North America's largest and best-known plumbing service -- Roto-Rooter -- but earns 70% of its revenue from hospice care.

The split personality hasn't won over the perplexed public. Shares (ticker: CHE) trade at a 23% discount to the health-care services sector because investors worry about a plumbing unit hitched to the housing market. Yet when they recently bid up housing-related stocks in hopes of an economic rebound, investors seemed to view Chemed as a health-care play. Its shares are up 12%, to about 38, since March 9, versus 46% for home builders.

Investors' conception of Chemed should come into sharper focus shortly, even if its clunky structure remains for a while. Chemed acquired its Vitas hospice unit five years ago and this February became eligible to spin off tax-free either it or the plumbing operation -- the two remaining units from what was a broader set of businesses. An opportunistic hedge fund, MMI Investments, recently amassed a 3.5% stake and is pushing to break up the company. It went so far as to field five board nominees but withdrew those candidates late last week -- after several proxy firms recommended investors vote for Chemed's directors.



The problem? Even critics of the board -- which one institutional shareholder describes as "very entrenched" -- think MMI was overeager, and most aren't convinced that a spinoff is the right move in this still-fragile market.

So why consider Chemed shares today? Both Vitas and Roto-Rooter are solid businesses that are undervalued. Chemed shares trade at just 11.3 times 2009 earnings estimates, well below 14.7 times for health-care services. The bigger Vitas unit benefits from the crop of aging baby boomers and increased acceptance of hospice care, and is a safer bet if the economy struggles. And should the economy rebound swiftly, the case builds for spinning off a unit into a more welcoming market.

Another worry: the Justice Department has subpoenaed Vitas' patient records and procedure manuals going back to 2003. Analysts say such investigations aren't uncommon, though they can drag on for a long time. (A 2005 probe was inconclusive.) Still, the inquiry has caused uncertainty for shareholders.

Roto-Rooter has suffered recently as Americans put off drain cleaning and other discretionary spending. Its plumbing jobs fell 6.9% last quarter, but Chemed raised prices to limit the revenue decline to just 0.2%. This cyclical business should rebound with the economy, and until then, steady cash flow and market dominance make it an acquirer in a landscape dotted with Mom-and-Pop shops.

The same could be said of Vitas. Admissions fell 6.9% in the latest quarter, but longer patient stays helped nudge revenue up 5%. "For the most part, Chemed has stockpiled cash but hasn't done any significant deal on the hospice side lately," says RBC analyst Frank Morgan, who sees potential acquisitions in this weak economy.

The threat of health-care reform weighs on Vitas, and the government has proposed cutting Medicare reimbursement to hospices by 1.1% this year and 2.1% in 2010. Analysts question if such cuts will be implemented, given their drastic impact on smaller, nonprofit hospices, but Chemed can withstand them by tightening wages. "Eventually, we could see a change in reimbursement that can cause consolidation in this very fragmented industry, but that will be a positive for Chemed and could provide another growth leg," says Oppenheimer analyst Michael Wiederhorn. He thinks the shares could be worth 52 in 12 to 18 months.

UNTIL THEN, INVESTOR SCRUTINY might persuade management to rein in spending, especially on things like a private jet, purchased last November for $8.6 million, equal to 36% of Chemed's 2008 capital expenditures. The 2001 Hawker 800XP replaces a 30-year-old plane and is leased out when it isn't used, a Chemed spokesman points out. Still, the line between a justifiable perk and indulgence can blur in a recession.

So what do hospices and plumbing have in common? The question sounds like a set-up for a punch line, and management has shrewdly shifted discussion from "whether" a spinoff will occur to "when" it might. Even Chemed's bankers at JPMorgan and Lazard Freres admit the two are "inherently different and do not yield traditional synergies" beyond some financial flexibility. "An ill-timed separation," cautioned CEO Kevin McNamara in a recent letter to investors, "could destroy stockholder value in the current economic environment."

The Bottom Line

The housing bust, among other worries, has held down Chemed stock in recent months. One analyst puts its upside more than 30% above recent levels within 12 to 18 months.Agitating for a spinoff is a much-used tactic in MMI's repertoire. It has pushed for split-ups at companies from Brinks ' (BCO) to Unisys (UIS) -- and the multiples it relies on to argue that the sum of Chemed's parts is worth 55 to 62 are conveniently generous. But Chemed management's boast that it delivers strong returns is just as lofty: Shares have risen 62% in the past five years. Still, that's well behind health-care services' 106% gain.

Shrill claims and mud-flinging are common when activist shareholders rattle cages, but Chemed isn't as possessive as MMI paints it to be; it has divested businesses including Patient Care in 2002 and Service America in 2005. Still, according to MMI, existing directors have squatted on this board for an average 16.7 years. With investors watching closely, Chemed has recently added two independent nominees to its slate. Slowly but surely, change is coming to Chemed.

Dr. Paul Price
Dr. Paul Price premium member - 4 years ago
Chemed announced a doubling of its quarterly dividend (from $0.06 to $0.12) in the latest period.

Record date… Aug. 17

Payment Date … Sep. 4

CHE shares closed at $43.69 yesterday.

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