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Chemed (CHE) combines Roto-Rooter with VITAS Healthcare - a hospice care subsidiary in one of the more unusual business pairings I’ve come across.

Both sides are nicely profitable though and Chemed’s overall results look excellent.

CHE reported Q1 numbers yesterday and came in a bit above estimates with EPS of $0.85 versus $0.69 year-over-year. Revenues were $295 MM versus $285.2 MM in last year’s Q1.

Analysts had been looking for $3.42 - $3.50 for the full year but management now says they’re comfortable with a range of $3.70 - $3.90 for 2009. At this afternoon’s quote of $40.84 that makes Chemed’s multiple a very low 11x the low end of the company’s projected range for this year.

That’s exactly half of the 10-year median P/E of 22x and the cheapest valuation for these shares in about 13 years.

Here are the per share numbers from the past few years as reported by

Value Line:

Year ….. Sales ….. C/F ….. EPS ….. B/V ….. Avg. P/E…52-wk Range

2004 …. 29.09 …...1.48 …. 0.78 …. 13.14 ….. 35.0x ….21.30 - 34.20

2005 …. 35.31 …...2.77 …. 1.95 …. 14.64 ….. 21.1x ….32.00 - 54.20

2006 …. 39.44 …...3.09 …. 2.16 …. 16.32 ….. 21.4x ….29.80 - 61.90

2007 …. 45.91 …...4.24 …. 3.04 …. 15.21 ….. 18.4x ….35.40 - 71.30

2008 …. 51.26 …...4.40 …. 3.05 …. 16.58 ….. 13.7x ….29.00 - 56.60

With a likely earnings advance of > 21% from 2008 to 2009 despite the poor economy I see big potential for P/E expansion from today’s depressed level.

If Chemed shares revert back to a still below normal 15 multiple on the company’s own $3.70 estimate, their shares could be back to $55.50 within 9 – 12 months or + 35.8% from this afternoon’s price.

Is that crazy? As seen from the chart above, CHE shares hit peak prices of $54.20 to $71.30 at some point in each calendar year from 2005 right through 2008 – all when fundamentals were not as good as they are right now.

I first wrote about Chemed here on Seeking Alpha back on April 29th of last year. It was $32.75 back then on the way to a quick move up to $56.60 in just a few months.

I bought back in yesterday for the first time since nibbling again last fall in the low $30’s.

In an investment landscape littered with companies posting lower sales and earnings, Chemed stands out as a growth company in a non-growth environment.

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For the option savvy readers in the group here’s a combination play I put on for myself this afternoon:

……………………………….....…. Cash Outlay ………. Cash Inflow

Buy 1000 shares @$40.84 …….. $40,840

Sell 10 Dec. $45 calls @$4.00 …..……………………….. $4,000

Sell 10 Dec. $40 puts @$5.30 ……..……………………... $5,300

Net Cash Out-of-Pocket ……..….. $31,540

On the November 20, 2009 expiration date if CHE shares have risen by at least $4.16 /share or + 10.2% from today’s price:

  • Your $45 calls will be exercised.
  • You will sell your shares for $45,000.
  • Your $40 puts will expire worthless.
  • You will have collected $120 in dividends.
  • You will have no further option obligations.
  • You will hold no shares and $45,120 cash for the original $31,540 outlay.

That’s a best-case scenario profit of $13,580.

$13,580/$31,540 = 43% gain cash-on-cash

That result would be achieved on a stock that only needed to go up by 10.2% over about seven months from trade inception.

What’s the Risk?

If Chemed shares were below $40 on expiration date:

  • Your $45 calls will expire worthless.
  • Your $40 puts will be exercised.
  • You will be forced to buy an additional 1000 shares and to lay out another $40,000 cash.
  • You would have collected $120 in dividends.
  • You will own 2000 shares of Chemed.
  • You will have no further option obligations.

What’s the break-even point on the whole trade?

  • On the first 1000 shares it’s their $40.84 purchase price less the $5.60 call premium /share = $35.24 /share.
  • On the ‘put’ shares it’s the $40 strike price less the $5.30 /share put premium = $34.70 /share.
  • Your break-even would be the average of $35.24 and $34.70 = $34.97 /share (not counting dividends).

That means Chemed shares could drop by as much as $5.87 /share or (-14.3%) from our starting price of $40.84 without you suffering a loss.

At $34.97 Chemed would be trading at just 9.45x expected 2009 earnings.

Disclosure: Author is long CHE shares and short CHE options.

Source: Chemed Corporation: A Weird Mix with Good Prospects