Chemed Corporation

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 4/5

Chemed Corporation provides hospice and palliative care services through VITAS Healthcare and plumbing, drain cleaning, and other related services through Roto-Rooter.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Chemed operates two distinct businesses: VITAS Healthcare, a provider of hospice care, and Roto-Rooter, a provider of plumbing and drain cleaning services.

Business Overview:

  • VITAS Healthcare: A provider of hospice care, mainly for Medicare beneficiaries. Revenue drivers include Medicare payments and care levels, along with a patient census heavily influenced by demographics.

* The primary source of revenue is Medicare, where the government pays a set amount for each day of care. This provides stability but also increases its reliance on government funding. * A major portion of services is care in patient homes, which requires the coordination of personnel and logistics, along with equipment and supplies

  • Roto-Rooter: A provider of plumbing and drain cleaning services across residential and commercial markets. Revenues are driven by service calls and volume, with a fairly stable recurring revenue base.
    • Roto-Rooter services involve a large number of employees, who require extensive training, and specialized equipment.
    • The services vary from routine maintenance to emergency repairs and may require specialized solutions.

Competitive Landscape:

VITAS Healthcare:

  • The hospice industry is characterized by intense competition, particularly from large, established players. Barriers to entry are not as high as the barriers to success.
  • The industry is also subject to regulatory scrutiny and potential changes in reimbursement rates. The government is a significant customer, which adds an additional layer of complexity.
  • A high percentage of care is in a patient’s home, which is becoming the primary form of delivery and needs significant planning for logistics and coordination.

Roto-Rooter:

  • The plumbing service sector is fragmented and extremely competitive. Differentiation primarily comes from brand recognition, local presence, and immediate response times.
  • National and regional players compete intensely to provide the best service for the given price.
  • The industry is relatively sensitive to economic conditions, as people may defer maintenance or repairs during downtimes.

What Makes CHE Different:

  • VITAS Healthcare:
    • Scale and reputation as a well-established hospice provider.
  VITAS Healthcare has the most experience operating under Medicare guidelines.
*   Extensive experience and relationships within the Medicare system give it an advantage over newer entrants.   *   Well-recognized brand that is synonymous with end-of-life care.  *   **Roto-Rooter:**
*   The strong brand name makes it recognizable, along with a large base of franchisees and skilled technicians.
*   An extensive distribution network of company-owned locations and franchises.

Financial Analysis:

Revenue Distribution and Recent Trends:

  • VITAS contributes more than half of CHE’s revenues. The company has seen an increase in revenues for both VITAS and Roto-Rooter divisions.

* Revenue trends demonstrate a 17.5% increase in adjusted EBITDA from the VITAS division, driven primarily by an increasing average Medicare revenue per day and more patients admitted. This was in spite of lower hospice services revenue driven by changes in Medicare and other public aid

  • Roto-Rooter continues to show consistent growth.

* Adjusted for divestitures, Roto-Rooter experienced revenue growth of 11.3% in Q3 2024.

Margins:

  • Gross margins are fairly consistent across segments.

* Adjusted EBITDA margins in Vitas have stayed relatively stable at 24.2% in Q3 2024.

  • Roto-Rooter’s operating margins have increased in recent periods.
  • Net income margins for CHE have seen some compression because of expenses in Vitas and Roto-Rooter.

Financials:

  • Liquidity and Solvency: They have a good liquidity position and positive cash flow. A revolving credit facility of $750 million is in place.
    • Debt levels are manageable.

* The debt-to-equity ratio is 118%, higher than peers.

Recent Concerns and Controversies:

  • Vitas healthcare has seen rising expenses related to labor and hiring of nurses.
    • Management is attempting to address this by making their employment more attractive.
  • There has been some concern about the changes in Medicare reimbursement policy, which could affect Vitas earnings.

* The government is increasing scrutiny of healthcare claims, and that could negatively impact Vitas.

Moat Assessment:

Rating: 2.5 / 5 (Narrow Moat with Potential for Erosion):

  • Brand Recognition: Both VITAS and Roto-Rooter have well-established brand names which help maintain their position. However, the effectiveness of a brand can be weakened by competitors in industries like healthcare and services.
  • Switching Costs: While Roto-Rooter benefits from switching costs, VITAS has very low switching costs. Customers are free to change hospices and insurance plans.
    • Roto-Rooter customers tend to be sticky since people don’t want to deal with the hassle of finding a new service provider unless necessary. This gives it some sort of moat, but it may erode given increasing competition in home and other services.
    • For VITAS, families typically have their primary focus to be the quality of care and are not very price-sensitive.
  • Niche Positions: Roto-Rooter operates in specific geographic niches that have few competitors, thus creating a local mini-monopoly.
  • Regulatory Approval: VITAS has a regulatory “mini-moat” through approvals, which is quite hard to get.
  • Limited Pricing Power: While these moats provide some competitive advantage, they don’t offer a lot of price power. This is especially true for VITAS due to medicare regulations.

Therefore, it is not a wide moat, but it has a relatively narrow moat, that can be eroded in the near future, specifically in the VITAS segment, given its reliance on Medicare and regulations.

Moat Risks and Business Resilience:

  • Technological Disruption: Technological changes in healthcare can change traditional models and reduce pricing for those who do not adapt.
  • Regulatory Changes: Medicare reimbursement rules for Vitas are subject to change and scrutiny. That may affect its margins.
  • Economic Cycles: Though Roto-Rooter is relatively stable during times of stress, a severe downturn in the economy could force clients to reduce their spending on services.
  • Labor Costs: The increasing demand for skilled nurses and plumbers may increase the cost of labor and squeeze margins.

Business Resilience:

  • Recession Proof: The company offers essential services that are less affected by economic downturns.
  • Strong Cash Flow: The company has positive and strong free cash flows that allow it to service debts and invest in future opportunities.

Understandability:

Rating: 3 / 5:

  • The core services offered are straightforward and easy to grasp, i.e. hospice care and plumbing services. However, it gets slightly complicated due to various factors such as regulation within healthcare and the impact of Medicare reimbursements. The intricacies of financial reporting, like segment accounting, also adds some complexity. Overall, it requires some effort but can be understood by an investor.

Balance Sheet Health:

Rating: 4 / 5:

  • Strong liquidity with cash reserves and credit facilities, along with manageable debt.
  • Positive cash flows can cover all its debt obligations and provide excess cash for future acquisitions. The company is disciplined in maintaining a solid capital structure.

Conclusion:

Chemed Corporation is a company with a diverse range of businesses, with the core being providing hospice care through VITAS. It has a narrow moat mostly because of established brands and customer stickiness, and there are several factors that could cause risks to earnings. Understanding what makes the company profitable and how it creates value is needed for long-term success. Investors should continue to closely evaluate any change in regulations and cost structure that can affect the future.