Executive Summary / Key Takeaways

• Resilient Dual-Segment Model: Chemed Corporation (CHE) leverages its unique structure, combining the essential hospice care services of VITAS Healthcare and the critical plumbing and drain services of Roto-Rooter, to deliver stable and diversified revenue streams, providing a robust foundation against sector-specific challenges.
• Strategic Adaptation in Healthcare: VITAS is proactively managing Medicare cap limitations, particularly in Florida, through a strategic shift towards higher hospital-based admissions and expansion into new Certificate of Need (CON) territories, aiming for no significant cap billing limitation in fiscal year 2026.
• Roto-Rooter's Digital Transformation and Market Rebound: Roto-Rooter is demonstrating a turnaround in revenue growth, driven by data-centric marketing campaigns, a focus on high-revenue add-on services like water restoration and excavation, and operational refinements to enhance pricing discipline and lead conversion, despite increased competition from private equity firms.
• Solid Financial Foundation and Capital Deployment: Despite some near-term margin pressures from strategic adjustments and increased marketing spend, Chemed maintains a strong balance sheet, healthy cash flow, and a consistent capital allocation strategy that includes programmatic share repurchases and opportunistic acquisitions.
• Positive Outlook with Operational Leverage: Management's reaffirmed 2025 guidance and preliminary 2026 outlook signal confidence in accelerating revenue growth and improving margins for both segments, underpinned by operational efficiencies and strategic investments designed to maximize profitability from evolving market dynamics.

Chemed's Dual-Engine Drive: Operational Agility Powers Growth Amidst Sectoral Shifts

Chemed Corporation (NYSE:CHE) stands as a distinctive entity in the market, operating a diversified portfolio that spans two seemingly disparate yet fundamentally essential service sectors: hospice care through VITAS Healthcare Corporation and plumbing and drain services via Roto-Rooter Group, Inc. This dual-engine model has historically provided a resilient foundation, enabling the company to adapt and thrive amidst evolving industry landscapes. Since its incorporation in 1970, Chemed's strategic journey has been marked by a consistent focus on operational excellence, targeted acquisitions, and a proactive approach to regulatory and competitive dynamics, all of which continue to shape its investment thesis today.

The company's history underscores its adaptive capacity. The acquisition of VITAS in 2004 marked a pivotal entry into end-of-life care, a sector characterized by significant regulatory oversight, particularly the Medicare cap. Subsequent financial restructuring, including the 2022 credit facilities and the repayment of a term loan in 2023, has fortified Chemed's liquidity and capital management. Recent strategic acquisitions, such as VITAS's $85 million purchase of Covenant Health operations in April 2024 and Roto-Rooter's franchise expansions, highlight a continuous drive for growth and operational synergy.

Technological Edge and Operational Innovation

While Chemed may not be a pure-play technology firm, its operational strategies are increasingly underpinned by data-driven and evolving technological approaches, particularly within its Roto-Rooter segment. The company is actively engaged in "groundbreaking changes with AI and whatnot" to address shifts in lead generation, where potential customers increasingly turn to the internet and platforms like Google. This involves a "multipronged campaign" that includes more targeted internet focus on specific services, enhanced sales materials for field technicians, and frequent close rate reporting to branch management. These initiatives are designed to maximize opportunities from incoming leads and improve conversion rates, directly impacting revenue and profitability.

For VITAS, while explicit technological differentiators are not detailed, the segment's operational excellence in managing complex patient mixes, optimizing staffing levels, and strategically entering new Certificate of Need (CON) markets demonstrates a sophisticated, data-informed approach to healthcare delivery. The ability to consistently attract and retain licensed healthcare professionals, leading to 11 quarters of sequential net growth in licensed healthcare workers and 10 quarters of sequential growth in Average Daily Census (ADC), speaks to a highly efficient and well-managed operational framework. For investors, these technological and operational innovations translate into a stronger competitive moat, enabling Roto-Rooter to mitigate rising marketing costs and VITAS to navigate regulatory complexities, ultimately supporting sustained financial performance and market positioning.

VITAS: Adapting to Regulatory Realities

VITAS Healthcare, the nation's largest provider of end-of-life care, continues to demonstrate resilience in a heavily regulated environment. For the three months ended September 30, 2025, VITAS reported net revenue of $407.741 million, a 4.2% increase year-over-year, driven primarily by a 2.5% increase in days-of-care and a 4.1% increase in Medicare reimbursement rates. For the first nine months of 2025, net revenue grew 8.2% to $1.21 billion. However, profitability has seen some pressure, with adjusted EBITDA (excluding Medicare cap) declining 3.8% to $70.4 million in Q3 2025, resulting in an adjusted EBITDA margin of 17.0%, down 157 basis points from the prior year. This decline is largely attributed to an increase in Medicare Cap liability and variable patient care expenses.

A central theme for VITAS is its proactive management of Medicare cap limitations, particularly in Florida. The company previously estimated a $19 million billing limitation for the 2025 Medicare Cap year in Florida, which came in slightly better at $18.9 million. This challenge was exacerbated by a significant rate differential in 2025, where Florida's reimbursement rate increase was substantially higher than the Medicare cap increase, creating a "headwind" of approximately $22 million to $25 million. In response, VITAS has strategically shifted its patient mix, emphasizing hospital-based admissions, which typically result in shorter lengths of stay and provide "additional cap cushion." This strategy is yielding results, with hospital admissions reaching a post-pandemic high of 44.5% of total admissions in Q3 2025. Management is confident that there will be no significant Medicare Cap billing limitation for its Florida program in fiscal year 2026, anticipating a more manageable rate differential of 30 to 40 basis points, equating to a $3 million to $4 million headwind.

In the competitive landscape, VITAS differentiates itself through its comprehensive, multidisciplinary care model and strong local execution. While larger, more diversified healthcare entities like UnitedHealth Group (UNH) and Encompass Health (EHC) leverage vast resources and technological integration, VITAS's specialized focus on end-of-life care and community-based delivery fosters strong customer loyalty. Compared to Amedisys (AMED), another significant hospice provider, VITAS's strategic entry into new Certificate of Need (CON) markets, such as Pinellas and Marion counties in Florida, positions it for organic growth. The Marion County program, opened in May 2025, has already grown to an ADC of 75 and is projected to double by the end of 2026, further bolstering future cap cushion and growth.

Roto-Rooter: Reclaiming Market Momentum

Roto-Rooter, the nation's largest provider of plumbing and drain cleaning services, is demonstrating a strategic rebound despite a challenging competitive environment. For the three months ended September 30, 2025, Roto-Rooter's net revenue increased 1.1% to $217.159 million, with nine-month revenue reaching $679.3 million, up 1.2% year-over-year. This growth was primarily driven by increases in residential plumbing (up 8.2%), excavation (up 5.9%), and water restoration (up 6.6%), offsetting a decline in drain cleaning. However, revenue from independent contractors declined by 4.7% in Q3 2025, as these smaller operations often lack the capability for add-on services that drive growth at company-owned branches.

The segment's profitability has faced headwinds, with adjusted EBITDA for Q3 2025 decreasing 12.4% to $49.4 million, and the adjusted EBITDA margin falling to 22.7% from 26.3% in Q3 2024. This margin pressure stems from a shift in lead generation, where paid leads now constitute over 50% of all leads, up from a historical 40%. This increases SG&A costs, as the company pays more for leads that were previously "natural" or unpaid. Management notes that this trend, while impacting margins, also suggests a "potential moderation of competition" from significant private equity competitors who are also being forced to pay for more leads.

Roto-Rooter's competitive positioning is anchored by its strong brand awareness, rapid customer response times, and 24/7 call centers. Against private equity-backed competitors, who often engage in "race to the bottom" pricing for basic drain cleaning, Roto-Rooter differentiates by excelling in higher-value add-on services like water restoration and excavation. A multipronged campaign targeting high-revenue plumbing services, including enhanced internet focus and technician sales materials, has yielded positive results. Management is also refining its excavation pricing model to balance revenue growth and EBITDA margin, acknowledging that large commercial excavation jobs, while driving significant revenue, typically operate at a slightly lower margin. Operational initiatives, including tighter controls around technician discounting and efforts to reduce casualty and workers' compensation costs, are expected to improve margins, with an additional $4 million in expense baked into the second half of 2025 guidance for these insurance-related costs.

Financial Health and Capital Allocation

Chemed maintains a robust financial position, characterized by a strong balance sheet and healthy cash flow generation. As of September 30, 2025, the company reported cash and cash equivalents of $129.752 million. Net cash provided by operating activities for the nine months ended September 30, 2025, increased by $2.2 million to $254.739 million compared to the prior year period. The company's debt-to-equity ratio stands at a conservative 0.13, reflecting its commitment to maintaining a low leverage profile.

Liquidity is further bolstered by approximately $404.5 million in unused lines of credit available under its $450 million revolving credit facility. Chemed's capital allocation strategy remains consistent, prioritizing shareholder returns through dividends and share repurchases, alongside strategic acquisitions. The Board of Directors authorized an additional $300 million for stock repurchase on August 1, 2025, with $301.8 million remaining under the existing plan. Management views programmatic share repurchases as a key method to return free cash flow to shareholders while maintaining financial flexibility for opportunistic acquisitions.

Outlook and Investment Implications

Chemed's management reaffirmed its full-year 2025 adjusted diluted EPS guidance in the range of $22.00 to $22.30, a revision from the previously issued range of $24.95 to $25.45, reflecting the strategic adjustments and headwinds experienced earlier in the year. This guidance assumes an effective tax rate of 25.3% and a diluted share count of 14.7 million shares. The earnings trajectory for 2025 is weighted towards the second half of the year, with Roto-Rooter's revenue and income expected to accelerate as business improvement initiatives gain traction, and VITAS benefiting from seasonal rate increases and operational efficiencies.

For 2026, preliminary outlook suggests VITAS revenue growth in the 8% range with margins of 17.5% to 18.0%, and Roto-Rooter revenue growth between 3% and 5% with long-term EBITDA margins targeted at 25% to 26%. These projections underscore management's confidence in the long-term growth potential of both segments, driven by strategic adaptations, market share capture, and operational leverage. The expectation of no significant Medicare Cap billing limitation for Florida in fiscal year 2026 is a critical assumption for VITAS's future profitability.

Risks and Challenges

Despite the positive outlook, investors should consider several key risks. VITAS faces ongoing regulatory scrutiny, particularly concerning Medicare and Medicaid billing requirements, and a high concentration of receivables from government programs (approximately 77% of consolidated net accounts receivable). The segment's reliance on single vendors for pharmacy services and medical supplies also presents a supply chain risk. Furthermore, a cybersecurity incident at VITAS in October 2025, involving potential data theft of protected health information, highlights ongoing digital security risks, though the company believes it has contained the incident and expects no material impact on operations. Macroeconomic factors such as inflation and potential tariffs could also impact net sales and profitability across both segments.

Conclusion

Chemed Corporation's investment thesis is compelling, rooted in its unique dual-segment model that combines the stable, essential services of hospice care and plumbing. The company's history of strategic adaptation, coupled with ongoing operational refinements and targeted investments in technology and market expansion, positions it for sustained growth. While VITAS is actively managing regulatory complexities and Roto-Rooter is combating competitive pressures through data-driven strategies and service diversification, both segments are demonstrating operational agility to optimize performance. The reaffirmed 2025 guidance and positive preliminary outlook for 2026, supported by a strong balance sheet and disciplined capital allocation, suggest that Chemed is well-equipped to drive shareholder value by leveraging its diversified strengths and strategic leadership in evolving markets.