Equity Research. Chemed Corporation (CHE-NYSE) CHE: Zacks Company Report - HOLD OUTLOOK SUMMARY DATA ZACKS ESTIMATES

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1 Equity Research October 22, 2008 Chris Kallos North Canal Street, Chicago, IL Chemed Corporation (CHE-NYSE) CHE: Zacks Company Report - HOLD Current Recommendation Hold Prior Recommendation Buy Date of Last Change 07/23/2008 Current Price (10/21/08) $36.40 Six- Month Target Price $39.00 SUMMARY DATA 52-Week High $ Week Low $32.04 One-Year Return (%) Beta 0.85 Average Daily Volume (sh) 288,868 Shares Outstanding (mil) 23 Market Capitalization ($mil) $834 Short Interest Ratio (days) Institutional Ownership (%) 98 Insider Ownership (%) 6 Annual Cash Dividend $0.24 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 28.8 Earnings Per Share (%) 45.8 Dividend (%) 0.0 P/E using 12 months EPS 12.3 P/E using 2008 Estimate 11.7 P/E using 2009 Estimate 11.2 Zacks Rank 3 OUTLOOK CHE, through its two primary subsidiaries of Vitas and Roto-Rooter, is a major player in both the hospice and plumbing industries, respectively. The company reported 3Q08 net income of $17.95M (effectively flat y/y), or EPS of $0.79, compared with net income and EPS of $18.12M and $0.74 respectively in 3Q07. We are encouraged by the performance of VITAS, which reported solid increases in both net income and gross margin and offset the y/y decline in net income and adjusted EBITDA of the Roto Rooter division. We continue to view the current economic conditions as a medium term challenge for the Roto Rooter division and maintain our Hold rating at current levels. Risk Level High Type of Stock Mid-Blend Industry Med-Outp/Hm Cre Zacks Rank in Industry 14 of 35 ZACKS ESTIMATES Revenue (in millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 250 A 253 A 272 A 1,019 A A 271 A 273 A 286 A 1,100 A A 283 A 288 A 300 E 1,157 E ,197 E Earnings per Share (EPS is operating earnings before non recurring items) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2006 $0.47 A $0.49 A $0.47 A $0.71 A $2.26 A 2007 $0.63 A $0.73 A $0.69 A $0.92 A $2.95 A 2008 $0.69 A $0.73 A $0.79 A $0.88 E $3.10 E 2009 $3.24 E Zacks Projected EPS Growth Rate - Next 5 Years % 15 Copyright 2008, Zacks Investment Research. All Rights Reserved.

2 OVERVIEW Chemed Corporation (CHE, formerly Roto-Rooter, Inc.) is headquartered in Cincinnati, Ohio. Publicly traded since 1971, Chemed currently operates in the healthcare field through its Vitas Healthcare Corporation (Vitas) subsidiary, and in the residential and commercial repair and maintenance service industry under the name Roto-Rooter. The company has evolved since its incorporation in 1970 through numerous acquisitions and divestments of diversified businesses. The most significant recent transaction involved the acquisition of the remaining 63% of common stock in previously privately held Vitas not already owned by Chemed, completed on February 24, 2004, and the more recent disposal of the company s Service America subsidiary on December 29, The Service America subsidiary, located throughout Florida and in Phoenix, Arizona, was divested through an asset sale to employees of Service America. Vitas Healthcare Corporation (Vitas), based in Miami, Florida, is the nation s largest provider of hospice services with about a 7% share of the U.S. hospice market. Vitas commenced operations in 1978 and incorporated in 1983 as a for-profit organization. Vitas Healthcare currently provides services to almost 9,000 patients from 44 hospice programs in 11 states. These areas include: California, Connecticut, Delaware, Florida, Georgia, Illinois, New Jersey, Ohio, Pennsylvania, Texas and Wisconsin. Over half of Vitas patients receive care in their homes. Approximately 40% of patients receive care in skilled nursing and assisted living facilities. The organization classifies its services based on location and type of care provided. The major classifications are: Home Care, Continuous Care, and Inpatient Care. Home Care refers to routine care provided to patients and their families residing at home or in a nursing facility, where the provider is paid the routine home care rate for each day per patient. Continuous care is the care provided to patients while they are at home during periods of crisis involving intensive monitoring and care. Inpatient care refers to short-term care provided in a participating hospice inpatient unit, hospital, or skilled nursing facility. All of Vitas operations, including clinical operations, billing and collections, accounts payable and claims processing, financial reporting, human resources, and compliances are supported by the company s proprietary information systems. The capital required to establish a single hospice facility is currently estimated at between $300,000 and $500,000. As a result, competition notwithstanding the not-for-profit providers, which constitute more than 72% of all hospices, is significant (albeit highly fragmented). A large number of hospice programs are owned by, or are part of, a larger healthcare delivery system, typically not-for-profit hospitals. In addition to not-for-profit service providers, the industry is also characterized by a high number of small regional operators. However, nine of the top 10 providers, as measured by average daily census (ADC), are forprofit. Average daily census refers to the total number of patients, regardless of the level of service. The major publicly traded hospice industry players, which include Vitas, Odyssey, VistaCare, and Manor Care, collectively only account for approximately 15% of the market. While the relatively low absolute capital requirements represent a low barrier to entry, the regulatory complexity associated with establishing a Medicare-licensed hospice location remains a significant barrier. In addition, hospice referral sources are largely dependent on relationships and reputations established over time through the provision of high-quality care and service. Roto-Rooter, Inc. was founded in Des Moines, Iowa, in 1935 by Samuel Blanc, and is currently the largest provider of plumbing and drain cleaning services in North America. Roto-Rooter operates through more than 100 company-owned branches, independent contractors, and 500 franchisees. Either directly or indirectly via franchising, the total Roto-Rooter system is available to more than 90% of the U.S. population and approximately 40% of the Canadian population. Roto-Rooter also has licensed master franchisees in China, including Hong Kong, Indonesia, Japan, Mexico, the Philippines, and the United Kingdom. In 1980, the Blanc family sold Roto-Rooter to Cincinnati-based Chemed Corporation and subsequently moved its corporate headquarters to Cincinnati. In 1986, Roto-Rooter was spun off as a public company, with Chemed retaining majority ownership. In August 1996, Roto-Rooter again became a wholly owned subsidiary when Chemed bought back all outstanding shares. The U.S. residential/light commercial plumbing repair/replace market is valued at nearly $8 billion, comprising more than 50,000 Zacks Investment Research Page 2

3 small regional plumbing companies. The competitive landscape for the drain and plumbing services industry is intense at a local level. Points of differentiation amongst participants include brand/name recognition, speed and quality of customer service, service guarantees, and pricing. BULL STORY Industry fundamentals remain strong with market consolidation underpinning attractive growth opportunities for the company. According to the Centers for Medicare and Medicaid Services (CMS), the hospice market grew from approximately $200M in 1989 to over $4B in 2002, driven largely by an increasing awareness of hospice care and financial support under Medicare. Furthermore, with approximately 2.4 million people dying in the U.S. per annum, of which 1.7 million are 65 and older, less than 20% receive hospice care. We believe growth momentum will persist over the medium to long term, given the aging population. In addition, a growing awareness of hospice care alternatives is broadening the mix of hospice admission diagnoses, from a primarily cancer population to a mixture of cases that also include heart disease, Alzheimer s, and respiratory diseases. The hospice industry is highly fragmented, with more than 2,300 hospice locations throughout the country, most of which are small- and medium-sized providers, with 73% operating as not-for-profit organizations. With the large for-profit players only controlling an estimated 20% of the market, we believe the opportunities for further consolidation are significant. As a pioneer in the industry, CHE has well-established relationships with referral sources in a number of key states including Florida (where it has approximately 10% of the market), and California. Furthermore, the company s service offering spans all segments of hospice care and end-of-life disease categories, which we believe is a key point of differentiation. Vitas Healthcare was also, until recently, the only for-profit hospice provider in the state of Florida with a Certificate of Need accreditation. The Certificate of Need (CON) program was introduced in 1980 and is a regulatory process that requires certain healthcare providers, such as hospices, to obtain state approval before offering new expanded services, or making major capital expenditures. Notwithstanding the division s high operating margin, we continue to believe the potential spin-off of the Roto-Rooter business presents a potential near-term catalyst for the stock. BEAR STORY The hospice industry is heavily regulated at both the state and federal level. As a result, the company is vulnerable to changes in reimbursement rates or changes in methods governing calculation of reimbursement levels. Overall aggregate payments made to a hospice are subject to a "cap amount" calculated by the service provider at the end of the hospice cap period. The cap period runs from November 1st of each year through October 31st of the next year. The total payment made for services furnished to Medicare beneficiaries during this period is compared to the " cap amount" for this period. Any payments in excess of the cap must be refunded by the hospice. Overall, various factors that enter into the computation of the Medicare cap contractual can create significant short-term volatility, a major issue for all industry players. In addition, low barriers to entry are encouraging new market entrants and increasing competition. Zacks Investment Research Page 3

4 RECENT NEWS On October 21, 2008 CHE announced 3Q08 financial results. The company reported 3Q08 net income of $17.95M (effectively flat y/y), or EPS of $0.79, compared with net income and EPS of $18.12M and $0.74 respectively in 3Q07. Consolidated revenue from continuing operations in 3Q08 was $288.3M, up 6% y/y, versus $272.5M in 3Q07. Consolidated adjusted EBITDA in 3Q08 was $41.5M, up 11.3% y/y. Cash and cash equivalents on the balance sheet as at September 30, 2008, totaled $6.8M versus longterm debt of $217M. That said, $200M of the company s outstanding long-term debt carries an interest rate of 1.875% and is due in May The remaining debt consists of a bank term loan with a current interest rate of approximately 4.7%. The hospice segment (VITAS) generated 3Q08 net revenue of $205M, up 8.7% y/y. Revenue growth was attributed to a 4.4% y/y increase in ADC and a Medicare price increase of 3.2% y/y. Vitas reported net income in 3Q08 of $17.6M, up 16% y/y, compared with $15.1M in 3Q08. Total admissions in 3Q08 declined 1% y/y to 13,317. Gross margin in 3Q08 was 23.6%, up 190 bps y/y, and up 170 bps sequentially, driven according to management primarily by improved labor management of the routine homecare business. Adjusted EBITDA totaled $31.1M, up 26.1% y/y, which equated to an adjusted EBITDA margin of 15.2%. SG&A expenses in 3Q08 were $17.1M, up 9.3% y/y. The Roto Rooter business (plumbing and drain cleaning division) generated sales of $83M for 3Q08, down 1% y/y approximately, compared with $84M in 2Q07. Net income for 3Q08 was $7.957M, down 14% y/y. Adjusted EBITDA in 3Q08 was $13.7M, down 12.1% y/y, and represented an adjusted EBITDA margin of 16.4%. Management increased FY08 EPS guidance to between $3.35 and $3.40 (previously $3.15 and $3.20), which incorporated: estimated full-year revenue growth of VITAS, prior to Medicare Cap, of 8% to 8.5%, increased admissions of 4%, and adjusted EBITDA margins, prior to Medicare Cap, of 14.1% to 14.3% in 2H08. Roto-Rooter is estimated to generate FY08 revenue of between $340M and $344M, with an adjusted EBITDA margin in the range of between 17.7% and 18.0% (previously 18% and 19%). Management also disclosed that the company was in preliminary discussions, as well as final negotiations, to acquire a number of Roto Rooter franchise territories. Average number of shares outstanding in 3Q08 was 22.8M, down 7% y/y, compared with 24.5M in 3Q07. Zacks Investment Research Page 4

5 VALUATION We have valued CHE on a forward price/earnings (P/E) basis, as well as a comparison to similar firms in the hospice sector. Our price target of $39 is derived using a multiple of 12 times (x) FY09 EPS of $3.24. Industry Comparables Pr Chg P/E CFY EPS Gr Price/ Price/ Price/ YTD 5Yr Est Book Sales CF CHEMED CORP Industry Mean Industry Median S&P GENTIVA HEALTH CHARLES RVR LAB AMEDISYS INC ICON PLC PROJECTED INCOME STATEMENT & BALANCE SHEET Chemed Corp Income Statement and Balance Sheet (Dollars in millions, except EPS data) 12/03 12/04 12/05 12/06 12/07 12/08E Sales ,019 1,100 1,157 Cost of Goods Sold SG&A Other operating expenses Interest and other Zacks Adjusted Income before NRI Net Income Diluted EPS before NRI Reported EPS Cash & Marketable Securities Current Assets Current Liabilities Long Term Debt Shareholder's Equity Zacks Investment Research Page 5

6 HISTORICAL ZACKS RECOMMENDATIONS DISCLOSURES The analysts contributing to this report do not hold any shares of CHE. Zacks EPS and revenue forecasts are not consensus forecasts. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Buy- Zacks expects that the subject company will outperform the broader U.S. equity market over the next one to two quarters. Hold- Zacks expects that the company will perform in line with the broader U.S. equity market over the next one to two quarters. Sell- Zacks expects the company will under perform the broader U.S. Equity market over the next one to two quarters. The current distribution of Zacks Ratings is as follows on the 1067 companies covered: Buy- 25.2%, Hold- 66.6%, Sell 7.9%. Data is as of midnight on the business day immediately prior to this publication. Zacks Investment Research Page 6