Over the past six months, Chemed has been a great trade, beating the S&P 500 by 11.9%. Its stock price has climbed to $493.23, representing a healthy 26.2% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Chemed, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Chemed Not Exciting?
Despite the momentum, we don’t have much confidence in Chemed. Here are three reasons you should be careful with CHE, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Chemed’s sales grew at a mediocre 4.1% compounded annual growth rate over the last five years. This was below our standard for the healthcare sector.
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.
Analyzing the trend in its profitability, Chemed’s adjusted operating margin decreased by 3.9 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 13.5%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Chemed’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Chemed’s business quality ultimately falls short of our standards. With its shares topping the market in recent months, the stock trades at 19.4× forward P/E (or $493.23 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re fairly confident there are better stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of Chemed
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