Talk about a Christmas gift. On Dec. 23, 2003, I was calling Roto-Rooter (yes, the folks that specialize in cleaning your drains and pipes) A Cheap Health-Care Stock. In hindsight, that was a good call. Since then, the stock -- now known as Chemed
Consolidated revenues increased 16% to $233 million, while net income increased 37% to $14 million. Despite the name change from the iconic Roto-Rooter, the nation's leading plumbing company is still part of the family. In the third quarter, division revenue (compared with the same year-ago quarter) increased 9.2% to $72.9 million (31.3% of total sales) and net income (after adjustments for one-time items) soared 16.5%. Operating margins, at a lucky 13%, are up 0.6% over last year.
The company's lesser-known but larger business is VITAS, the nation's largest hospice provider. Revenue increased 18.7% and net income shot up 28.9%. Operating margins rose 0.2% to 11.1%. Since closing the acquisition in February 2004, Chemed has grown VITAS from 25 programs operating in eight states to 34 programs in 12 states.
When purchasing the 63% of VITAS it did not own for $406 million, Chemed stuck to its conservative roots. Although taking on a sizable $395 million in debt, the company also sold 2 million shares at $50 each -- thereby maintaining reasonable debt-to-equity ratios. Since then, the company has continued to expand VITAS, while reducing Chemed's net debt (total debt minus cash) from $242.4 million a year ago to $197.8 million now.
All of this good news also has a happy ending. Like last quarter, the company is raising earnings guidance for 2005 to a range of $1.87 to $1.90 a share -- excluding the cost for early debt extinguishment and other charges not indicative of ongoing operations. Wall Street liked the news: Chemed was the largest percentage gainer on the NYSE on Friday.
Chemed, at about 25 times estimated 2005 earnings, is expected by analysts to grow earnings by 19% annually for the next five years. That's a pretty hefty multiple by estimation, but it is certainty justified by the company's ability to reduce debt and increase earnings at double-digit rates.
For now, Chemed's stock looks reasonably priced, but it should experience price appreciation ahead of the market if its 19% annual growth materializes. Those looking for a hospice investment in a more broadly based health-care company might want to consider Manor Care
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