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CHE - Chemed Corp


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The main thesis for this investment is that the managers are tremendous capital allocators in easy to understand businesses.  Not much has been written up on this company –a few seeking Alpha articles and a VIC (short article).  It doesn’t appear cheap (I’d classify it as a premium)– 25 PE, 13 EV to EBITDA, and Price to Free Cash Flow.  With focus on capital allocation and growth in the core businesses they have proven for well over a decade they can compound significantly (28% per year since 2003 –chart below).  The PE is at its highest level since 2005.  It is hard to determine if the price is worth the investment.  Like all the compounders can they continue to execute.  It’s hard to get info on the CEO -Kevin McNamara 61.  But the past record has been tremendous. 

 

I’d be curious to get thoughts. 

 

They operate two businesses with a focus on decentralization and capital allocation. Chemed purchases, operates and divests subsidiaries engaged in diverse business activities for the purposes of maximizing shareholder value.  10-k

 

In the 90’s, the company was active in more businesses.  They purchased Roto-Rooter in 1996 and completed a merger with Vitas in 2004.  Since 2006 the company has operated in their two current businesses.  I have not spent a lot of time going through the discontinued operations.

 

Currently in two businesses:

VITAS segment (VITAS) and the Roto-Rooter segment (Roto-Rooter). VITAS provides hospice and palliative care services to its patients through a network of physicians, registered nurses, home health aides, social workers, clergy and volunteers. Roto-Rooter provides plumbing and drain cleaning services to both residential and commercial customers.  10-k

 

Roto-Rooter

I can’t think of another national or local brand in this industry.  I’ve used Roto-Rooter at least twice and was completely satisfied with the result.  Didn’t the Roman’s fine tune modern plumbing?  Fear of technology advancement is limited.    I like this business. 

 

Growth for this company is coming in Water Restoration.  Cleaning up the mess is the expansion opportunity for Roto.  Roto grew revenue 9.7% last quarter and it is primarily attributed to water restoration services.  They are taking this growth slow and developing the infrastructure to continue expansion. 

 

I don’t have info on Roto Rooters market share?

 

Vitas

The hospice and palliative care business is a bit trickier.  It is heavily regulated and the company has a few outstanding lawsuits.  My expertise in this industry is below average.  If anyone can shed light of the risks I am completely open. 

 

My instincts tell me this is stable business.  People will continue to pass away as baby boomers age (kind of morbid I know).  You have to provide outstanding service and develop a referral network.  Approximately 90% of VITAS’ revenue is from the United States government through the Medicare program. The loss of a portion or all of our Medicare revenue would have a material adverse effect on the Company. 10-k

 

A few years ago the short interest was above 40% now down to 20%.  On May 10th, 2013 Citron Research issued a scathing report that alleges defrauding of Medicare.  See below.

http://www.citronresearch.com/wp-content/uploads/2013/05/Chemed-Game-Over-final.pdf

 

Above is the main challenge with the business – regulation and future lawsuits. 

 

According to the 2015 Proxy they have compounded at 28.1% for adjusted NI as well as stock price.  The stock price is up 40% this year.  Not too excited about that.  - see attachment

http://www.sec.gov/Archives/edgar/data/19584/000115752315001104/a51062361.htm

 

Thesis:- Buying a fantastic company with tremendous capital allocators. 

- Since 2010 share count has decreased from 23mm to 17.4mm about 25% in 4.5 years.

- .6% dividend

- Consistent and growing earnings. 

- ROE 15 to 22% over the last 10 years.

- The price for this company premium. 

 

I can provide more financials if people are interested in discussing. 

 

eps_chem.docx

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From the Q4 2014 transcript

In our current high valuation environment, potential synergies are going to the seller and the timeframe to recover the cost of capital is as long as 20 years. And this is before any consideration that is given to integration and operating risk of these acquisitions. Given these economics, it should be no surprise that we concluded acquisitions currently are high risk, low return and not a viable growth strategy for us.

 

Absent reasonable valuation of acquisitions, we have determined share repurchase and dividends are the best use of cash to maximize long-term shareholder value. To put this into context, since May 2007, Chemed has repurchased 11.6 million shares of Chemed stock, aggregating $707 million at an average share cost of $61.13. In addition, during this period, Chemed has consistently raised its dividend distributing over $85 million in dividends. Combine, share repurchases and dividends totaled just under $800 million over the past eight years, which is almost exactly the free cash flow generated over this period.

 

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  • 2 months later...

It seems this company did it again with the 3rd qtr results.  The price got up to 153 now at 128.  Although probably up big in the morning.  Priced at a PE of 19-20 was a bit higher a few months ago.  The growth is catching up and the value shrunk a bit.  Still a premium but may be a great company for a slightly high price. 

 

Consolidated operating results:

• Revenue increased 7.8% to $386 million

• GAAP Diluted EPS increased 18.7% to $1.65

• Adjusted Diluted EPS increased 20.3% to $1.78

 

VITAS segment operating results:

• Net Patient Revenue of $285 million, an increase of 7.4%

• Average Daily Census (ADC) of 15,722, an increase of 7.4%

• Admissions of 16,131, an increase of 3.1%

• Net Income, including litigation costs, of $25.7 million, an increase of 19.1%

• Adjusted EBITDA of $45.3 million, an increase of 18.2%

• Adjusted EBITDA margin of 15.9%, an increase of 145 basis points

 

Roto-Rooter segment operating results:

• Revenue of $101 million, an increase of 8.8%

• Net Income of $11.0 million, an increase of 11.3%

• Adjusted EBITDA of $19.8 million, an increase of 14.6%

• Adjusted EBITDA margin of 19.5%, an increase of 98 basis points

 

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