Has Chemed Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Chemed (NYSE: CHE  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Chemed.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

5.4%

Fail

 

1-Year Revenue Growth > 12%

5.2%

Fail

Margins

Gross Margin > 35%

27.8%

Fail

 

Net Margin > 15%

6.3%

Fail

Balance Sheet

Debt to Equity < 50%

36.4%

Pass

 

Current Ratio > 1.3

1.39

Pass

Opportunities

Return on Equity > 15%

19.6%

Pass

Valuation

Normalized P/E < 20

13.63

Pass

Dividends

Current Yield > 2%

1.1%

Fail

 

5-Year Dividend Growth > 10%

22.4%

Pass

       
 

Total Score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Chemed last year, the company has picked up a point, with its current ratio rising above our critical level. The stock has performed nicely, though, rising more than 25% over the past year.

Chemed has a very unusual mix of businesses under one roof. Its Vitas division is one of the biggest hospice-care providers in the country. But it also operates the popular Roto-Rooter plumbing business. Lately, those businesses have been going in opposite directions, as Vitas is doing well but Roto-Rooter has seen drops in revenue and earnings.

In its most recent quarter, Chemed's results continued to show this split. Across the board, operating results for Vitas outperformed Roto-Rooter substantially, but overall, Chemed missed estimates on both the top and bottom lines. Given the problems that home-health specialists Amedisys (Nasdaq: AMED  ) and Gentiva Health (Nasdaq: GTIV  ) have had, Chemed's relatively benign report look better than its peers despite some warning signs.

Longer-term, the company's success will rely on changes to Medicare and other hospice-care payment providers. Chemed has largely avoided any billing limitations imposed by caps on Medicare, but four of its 35 providers had cushions of less than 5% before hitting their caps. Long-expected reductions in Medicare payments have worried investors in Chemed, as well as Almost Family (Nasdaq: AFAM  ) and their peers, but so far, they haven't come to pass.

For Chemed to improve, it needs to focus on boosting growth. Consolidation through a takeover could be a good way to proceed in an industry that's likely to see big changes in the near future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

While you can certainly make huge gains in health-care related stocks, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Click here to add Chemed to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2119419, ~/Articles/ArticleHandler.aspx, 10/20/2014 11:46:00 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement