Chemed's Earnings Miss: A Catalyst for Long-Term Value in a Resilient Healthcare Sector

Chemed Corporation (NYSE: CHE) has long been a bellwether for the healthcare sector's ability to balance operational resilience with growth. However, its Q2 2025 earnings report, released on July 29, 2025, exposed vulnerabilities in its business model. While the stock plummeted 8.8% in after-hours trading, the broader context—robust cash flows, a strong balance sheet, and a high-growth industry—suggests the earnings miss may be a buying opportunity for patient investors.

The Earnings Miss: A Harsh Reality Check

Chemed's adjusted earnings per share (EPS) of $4.27 in Q2 2025 fell short of expectations by 14.3%, and revenue of $618.8 million, while up 3.8% year-over-year, missed estimates by 4.89%. The VITAS segment, which provides hospice care, reported a 5.8% revenue increase but faced a 71-basis-point drag from acuity mix shifts and 379-basis-point headwinds from Medicare Cap limitations. Meanwhile, Roto-Rooter's adjusted EBITDA dropped 18.7%, driven by declining residential revenue and rising operating costs.

The company slashed full-year 2025 guidance from $24.95–$25.45 to $22.00–$22.30, a 11% reduction. This reflects not just near-term challenges but structural issues: Medicare Cap limitations in Florida alone cost VITAS $19 million in 2025, and digital advertising changes have eroded Roto-Rooter's lead generation.

Strategic Adjustments: Navigating a Complex Landscape

Despite the setbacks, Chemed's management has signaled a renewed focus on long-term resilience. Key moves include:
1. Leadership Stability: The departure of VITAS CEO Nick Westfall after 16 years was offset by the appointment of Joel Wherley, a seasoned COO. This transition aims to streamline operations and address Medicare Cap issues.
2. Cost Management: Roto-Rooter's management is aggressively reviewing expenses, including labor and insurance costs, to restore margins.
3. Share Buybacks: With $182.6 million in remaining repurchase authorization and $404.5 million in undrawn credit capacity, Chemed is leveraging its $249.9 million cash position to enhance shareholder value.

The company's defensive qualities—such as its low debt-to-equity ratio (0.12) and consistent dividend history (55 consecutive years)—underscore its ability to weather short-term turbulence.

Valuation Metrics: A Compelling Case for Undervaluation

Chemed's current valuation appears disconnected from its fundamentals. At a post-earnings price of $430.20, the stock trades at a price-to-earnings (P/E) ratio of 10.1x (based on its revised 2025 guidance of $22.15 EPS), significantly below the healthcare sector average of 15.3x. Its enterprise value to EBITDA (EV/EBITDA) of 9.8x also lags behind peers like UnitedHealth Group (12.1x) and DaVita (13.4x).

The PEG ratio of 0.7x, derived from its revised EPS guidance and projected 7.5–8.5% revenue growth for VITAS, further highlights undervaluation. In a sector expected to grow at 7.2% annually through 2030 (per Deloitte's 2025 healthcare outlook), Chemed's defensive cash flows and dual-business model position it to outperform.

Long-Term Growth: A Sector in Transformation

The healthcare industry is undergoing a digital and demographic shift. Hospice care, in particular, is poised to benefit from an aging population and rising demand for end-of-life services. VITAS's 5.8% revenue growth in Q2, despite Medicare Cap headwinds, hints at underlying demand. Meanwhile, Roto-Rooter's plumbing services, though facing near-term margin pressures, remain essential in a world where infrastructure spending is accelerating.

Chemed's ability to adapt—whether through AI-driven efficiency in hospice care or digital marketing innovations in Roto-Rooter—will determine its long-term success. The company's $550 million credit facility and $249.9 million cash balance provide flexibility to invest in these areas.

Investment Thesis: Buy the Dip, Not the Noise

While the earnings miss is concerning, it overlooks Chemed's structural strengths. Its free cash flow margin of 24.5% (up from 11.2% in 2024) and conservative leverage make it a rare “cash-generative” healthcare play. Analysts' average price target of $659.60 implies 53% upside from its July 29 closing price of $464.69, reflecting confidence in its ability to navigate Medicare Cap limitations and Roto-Rooter's cost issues.

For investors with a 3–5 year horizon, Chemed's current valuation offers a compelling entry point. The key risks—regulatory changes in hospice billing and Roto-Rooter's margin compression—are manageable, especially given the company's $182.6 million in buyback capacity and $404.5 million in undrawn credit.

Conclusion

Chemed's Q2 earnings miss is a wake-up call, not a death knell. The company's dual-business model, defensive cash flows, and strong balance sheet provide a foundation for long-term growth. While near-term challenges persist, the healthcare sector's demographic tailwinds and Chemed's strategic adjustments position it to deliver value to shareholders. For investors seeking a high-quality, undervalued play in a resilient industry, Chemed's post-earnings pullback may be a golden opportunity.