New Florida CON Sites Will Advance Home-Based And Hospice Care

Key Takeaways

• Expansion into underserved Florida counties and demographic trends in aging support substantial, long-term growth for VITAS hospice services.
  
• Operational efficiency, technology investment, and robust Roto-Rooter cash flow position Chemed for margin improvements and strategic acquisition-led growth.
  
• Exposure to reimbursement risks, margin pressure from payer limitations, weak demand, rising labor and insurance costs all threaten long-term profitability across Chemed's key divisions.

Catalysts

Provides hospice and palliative care services to patients through a network of physicians, registered nurses, home health aides, social workers, clergy, and volunteers primarily in the United States.

• The ramp-up of new Certificate of Need (CON) locations in underserved Florida counties (e.g., Pinellas and Marion) is expected to materially expand VITAS's service footprint, aligning with the continued aging U.S. population and the shift toward home-based care-both key drivers of higher patient volumes and long-term top-line revenue growth.
  
• Chemed is aggressively adjusting its patient mix and operational processes at VITAS to mitigate Medicare cap billing limitations, with expectations of normalized revenue and margin trajectory after 2025, which should result in a rebound in net margins and earnings as management's cap management strategies bear fruit.
  
• Ongoing investment in technology, cost management, and process optimization at both VITAS and Roto-Rooter is expected to gradually restore and improve operational efficiency, supporting sustained EBITDA margin expansion and higher net earnings over the longer term.
  
• The increasing societal and policy preference for hospice and end-of-life care (with hospital admissions up 9.1% year-over-year and further growth expected) supports higher length of stay and census metrics at VITAS, structurally lifting recurring revenue as demographic trends accelerate in coming years.
  
• The consistently strong cash flow from the Roto-Rooter business, despite near-term volume headwinds, underpins Chemed's ability to pursue opportunistic acquisitions in hospice and drive further consolidation, enhancing future market share and long-term earnings growth.

Chemed Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Chemed's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.2% today to 12.5% in 3 years time.
• Analysts expect earnings to reach $386.5 million (and earnings per share of $29.74) by about June 2029, up from $259.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 15.1x on those 2029 earnings, down from 21.7x today. This future PE is lower than the current PE for the US Healthcare industry at 23.2x.
• 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 7.11%, as per the Simply Wall St company report.

Risks

• The heavy reliance on Medicare/Medicaid reimbursement exposes Chemed's VITAS division to ongoing risks of rate limitations and potential future reimbursement changes, which have already resulted in material Medicare Cap billing limitations and could further compress revenue and net earnings if unfavorable trends persist or expand geographically.
  
• Shifting toward admitting more short-stay patients to avoid Medicare Cap limitations in Florida is negatively impacting revenue growth and EBITDA margins for VITAS, and this trade-off may result in structurally lower margins and slow improvement even if the cap issue subsides, affecting long-term profitability.
  
• Roto-Rooter's core residential revenue growth has been notably weak due to a combination of decreased consumer demand (fewer inbound calls/leads), increased competition-especially from private equity-backed rivals offering discount services-and higher customer acquisition costs through paid internet search, all of which threaten sustained revenue growth and margin recovery.
  
• Labor cost inefficiencies, particularly at Roto-Rooter, surfaced during periods of unexpectedly weak demand, resulting in idle workforce, higher commissions as a percentage of revenue, and amplified discounting-all contributing to significant EBITDA margin declines that could persist if workforce and demand misalignment is not swiftly corrected.
  
• Increased insurance, casualty, and workers' compensation costs-partly driven by actuarial re-assessments and changes in employee behavior during slow periods-have led to higher-than-expected expenses at Roto-Rooter, with additional risk that future actuarial shifts or operational hazards could further pressure net margins and overall earnings.

Valuation

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

• The analysts have a consensus price target of $446.5 for Chemed based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $500.0, and the most bearish reporting a price target of just $400.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $3.1 billion, earnings will come to $386.5 million, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 7.1%.
• Given the current share price of $426.41, the analyst price target of $446.5 is 4.5% 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.