AGGRESSIVE GROWTH

Chemed Corporation

Ticker symbol: CHE (NYSE) Large Cap Value Line financial strength rating: B++ Current yield: 0.4% Dividend raises, past 10 years: 10

Company Profile

“Call Roto-Rooter, that’s the name, and away go troubles down the drain” is the affable slogan of this well-known “root” business of the two-company conglomerate Chemed. Yes, if Roto-Rooter is the root, then those roots have sprouted a “tree” in an entirely different business: end-of-life health—hospice—care. Today’s Chemed is two businesses for the price of one: the VITAS Healthcare Corporation (67 percent of FY2018 revenues) and the original Roto-Rooter, now 33 percent of revenues (up from 29 percent in 2016). Consider this relatively new-to-our-list company a healthcare business, one for your health at the end of life, and one for the health of your home plumbing. Chemed came onto our list as a Mid Cap three years ago, and we’re happy to say it has “graduated” to Large Cap status. Always like when that happens…

As the name sounds like one of a chemical company, the name “Chemed” deserves some explanation. Its roots (sorry!) go back to a Cincinnati soap products maker (a familiar theme) known as DuBois Chemicals, which eventually made a name in the industrial cleaning products business. Chemed Corporation came on to the scene in 1971 when W.R. Grace, which had bought DuBois in 1964, spun it off as “Chemed.” Chemed bought and ran Roto-Rooter franchises, and as the saying goes, liked the business so much it bought the entire company in 1980 (it had been founded in 1935). Chemed decided to quit the capital-intensive and environmentally sensitive commodity chemical business in 1991 and sold DuBois. The company bought VITAS in 2004. After a few other acquisitions and divestitures, we arrive at today’s Chemed, a parent company of two distinct businesses. Both businesses are operated as wholly autonomous entities; the Chemed ownership or brand does not appear on either subsidiary’s website except under a well-subordinated “parent company” tab at the bottom of the VITAS page (www.vitas.com) and a bare mention on Roto-Rooter’s “About Us” page.

Founded in 1978 as a volunteer organization by a United Methodist minister and his wife, an oncology nurse, today’s VITAS business provides noncurative hospice and palliative care services to its patients through a network of physicians, registered nurses, home health aides, social workers, clergy, and volunteers. Included are spiritual and emotional counseling to both patients and their families. In 2018, VITAS provided over 6 million days of care in 14 states for over 82,000 patients and their families; about 98 percent of that in their home (2 percent in dedicated inpatient units). The median length of stay is about seven days; the average daily census is now about 18,000 patients, up from 15,000 in 2015. They estimate they own about 7 percent of the market. VITAS operates in an industry dominated primarily by small, nonprofit, community-based hospices. About 96 percent of revenue is from Medicare or Medicaid sources.

The name “Roto-Rooter” is probably more familiar to most of us. Roto-Rooter originally was created to offer round-the-clock drain cleaning and maintenance services using the familiar “snake” equipment they pioneered and now manufacture and sell. Today’s Roto-Rooter has expanded into providing a full line of on-site, often emergency-based plumbing and water restoration services both to residential and commercial customers; plumbing now accounts for about half of the subsidiary’s revenue. The business operates through 1,150 company-owned branches and independent contractors and 400 franchisees. The company covers 90 percent of the US and 40 percent of Canada’s population and holds about 15 percent of the drain cleaning market and a 2–3 percent share of the same-day plumbing fix market.

Financial Highlights, Fiscal Year 2018

FY2017 revenues rose almost 7 percent overall, although beneath the surface Roto-Rooter revenues increased 12.8 percent while VITAS, helped by an improved census and by slightly higher reimbursement rates, advanced about 5 percent. Net earnings were up 42 percent on operating efficiencies, tax cuts, and better reimbursement rates. For 2019 the company expects moderate growth in the 4–5 percent range on the hospice front and continued growth in the 9–10 percent range and margin expansion with selective price increases for Roto-Rooter; altogether earnings should increase 4–6 percent and per-share earnings 7–9 percent on a 6–7 percent bump in revenue. FY2020 forecasts call for a little higher growth rate in the VITAS segment (6 percent) and a little lower at Roto-Rooter—9 percent. Total net profit should rise 7–9 percent. Share buybacks in the 2 percent range will drive the already-low (15.5 million) share count lower, while dividend increases in the 10 percent range will sweeten the pot a little.

Reasons to Buy

Although Chemed has performed quite well and the stock price reflects it, we still like the potential here. Chemed offers the opportunity to buy into not one but two good businesses; both have a component of stability with ample growth opportunity. Both are leaders and recognized brands in highly fragmented industries; what other brand of plumbing services do you know aside from Roto-Rooter? Although the 14 states with current operations represent a populous cross section of the US, there is plenty of potential for geographic expansion in the VITAS business toward becoming a nationally recognized name, and possibly international. Also, increased understanding and use of home hospice services over more pricey hospitalization in end-of-life stages will help. The combined business exhibits improving margins, operating leverage, low debt, and strong cash generation and a willingness to return it to shareholders, mainly in the form of share buybacks. The small share count (15.5 million shares) is attractive so long as things are going well; there are relatively few shares to go around for institutional investors as the word gets out about Chemed.

Reasons for Caution

One may always wonder about the merits of managing two such completely disparate, unrelated businesses; as well, there is always a good possibility another (perhaps unrelated) company may be brought into the mix. Two disparate businesses may be manageable but as many learned in the late 1960s and early 1970s conglomerate boom, too many is not.

Chemed has already gained some appeal with the investment community; that and the low share count has driven recent share prices to high levels. The low share count can bring upside but also downside volatility if business conditions deteriorate. Shop carefully—else your investment results may be headed for life support—or worse, down the drain.

SECTOR: Healthcare Beta coefficient: 1.05 10-year compound earnings per-share growth: 12.5% 10-year compound dividends per-share growth: 16.0%

		2011	2012	2013	2014	2015	2016	2017	2018
Revenues (mil)		1,356	1,430	1,413	1,456	1,543	1,580	1,667	1,783
Net income (mil)		86.0	89.3	77.2	99.3	110.3	108.7	141.1	200.4
Earnings per share		4.10	4.62	4.16	5.57	6.33	6.48	8.43	11.93
Dividends per share		0.60	0.68	0.76	0.84	0.92	1.00	1.08	1.16
Cash flow per share		6.06	6.47	6.23	7.84	8.56	8.86	11.00	15.07
Price:	high	72.3	72.1	82.0	112.0	160.1	164.1	251.0	336.0
	low	47.7	49.1	61.7	72.5	100.5	124.8	158.8	243.7

Website: www.chemed.com