Chemed has been treading water for the past six months, recording a small return of 1.5% while holding steady at $560.78.
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?
We don't have much confidence in Chemed. Here are three reasons why there are better opportunities than CHE and a 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 have short-term success, but a top-tier one grows for years. Over the last five years, Chemed grew its sales at a mediocre 4.6% compounded annual growth rate. This was below our standard for the healthcare sector. 
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Chemed’s margin dropped by 8.9 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Chemed’s free cash flow margin for the trailing 12 months was 12.7%.
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).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Chemed’s ROIC has unfortunately decreased. 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 isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 21.7× forward P/E (or $560.78 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of our all-time favorite software stocks.
Stocks We Would Buy Instead of Chemed
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