Repositioned Hospice Mix And Aging Demographics Will Support Stronger Long Term Performance

Catalysts

About Chemed

Chemed operates VITAS Healthcare, a large hospice provider, and Roto-Rooter, a national plumbing and water restoration service business.

What are the underlying business or industry changes driving this perspective?

• VITAS is repositioning its admission mix away from an unusually high share of short-stay, hospital based patients toward a more balanced pattern that historically supports higher average daily census, which could feed through to steadier revenue growth and stronger EBITDA margins over time.
• The resolution of the Florida Medicare Cap issue, together with an estimated US$9.5 million Medicare Cap limitation in 2026 versus US$27.2 million in 2025, frees management to focus on growth initiatives rather than mitigation, which could support more predictable earnings and margin outcomes.
• New hospice certificates of need in multiple Florida counties, including Manatee, Pinellas, Marion and Pasco, increase VITAS’ addressable patient base and admissions potential, which may support higher revenue and EBITDA as these programs mature.
• An aging US population and management’s intention to pursue additional hospice starts and acquisitions in certificate of need states increase the long term demand pool for VITAS services, which can support sustained growth in average daily census, revenue and earnings.
• At Roto-Rooter, the combination of higher paid lead volumes, a specialist search engine optimization partner focused on improving natural search visibility, and a growing commercial sales force is aimed at lifting total leads and commercial mix, which could support 3% to 3.5% revenue growth and a 22.5% to 23% adjusted EBITDA margin in 2026.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Chemed compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Chemed's revenue will grow by 6.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 10.6% today to 13.4% in 3 years time.
• The bullish analysts expect earnings to reach $425.1 million (and earnings per share of $32.23) by about August 2029, up from $275.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $370.2 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 17.9x on those 2029 earnings, down from 25.6x today. This future PE is lower than the current PE for the US Healthcare industry at 24.7x.
• The bullish analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• VITAS is deliberately shifting its admission mix away from short stay, hospital based patients to support average daily census and margins, but this depends on successfully attracting and retaining longer stay patients in Florida and other markets. If referral patterns or competition limit access to those patients, revenue growth and EBITDA margins at VITAS could stay under pressure, which would flow through to consolidated earnings.
• The company expects Florida Medicare Cap limitations to be behind it and is applying similar approaches in California and other states. However, any change in Medicare rules, regional mix, or admission patterns that recreates cap exposure in larger programs could force another round of admission mix adjustments, putting a ceiling on revenue growth while still compressing net margins and earnings.
• Roto Rooter is increasingly reliant on paid digital leads as natural search visibility has fallen compared to the past. If search algorithms or paid lead costs move further against the company or private equity backed competitors continue to bid up advertising, customer acquisition costs could remain elevated, limiting the ability of even modest revenue growth to translate into higher EBITDA margin and consolidated profit.
• Water restoration at Roto Rooter is under scrutiny from insurers using artificial intelligence to challenge billing line by line. Although management is centralizing billing and collections, if insurer behavior keeps pressuring write offs or discourages branches from fully billing services, residential and commercial water restoration revenue and segment EBITDA margin could remain below prior levels, weighing on overall earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Chemed is $590.0, which represents up to two standard deviations above the consensus price target of $552.0. This valuation is based on what can be assumed as the expectations of Chemed's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $590.0, and the most bearish reporting a price target of just $520.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $3.2 billion, earnings will come to $425.1 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 7.2%.
• Given the current share price of $541.02, the analyst price target of $590.0 is 8.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.