Chemed's Q1 2025 Performance: A Strategic Deep Dive into VITAS Growth and Roto-Rooter Challenges

Chemed Corporation (NYSE: CHE) has long been a poster child for strategic capital allocation and disciplined growth. In Q1 2025, the company's results underscored a familiar narrative: its VITAS Healthcare segment delivered robust performance, while Roto-Rooter faced headwinds. This divergence raises critical questions for investors evaluating Chemed's long-term potential. Is VITAS's momentum sustainable enough to offset Roto-Rooter's stagnation? Can the company's strategic initiatives unlock shareholder value in both segments, or does the latter's underperformance signal the need for a pivot?

VITAS: A Powerhouse of Growth

VITAS's Q1 results were nothing short of stellar. Revenue surged 15.1% to $407.4 million, driven by a 11.9% increase in days-of-care and a 3.2% rise in Medicare reimbursement rates. The acquisition of Covenant Health's hospice assets in April 2024 added $11.5 million in incremental revenue, validating Chemed's M&A strategy. Adjusted EBITDA grew 15.9% to $70.3 million, with margins expanding to 17.2%, reflecting operational efficiency.

The segment's growth is underpinned by secular tailwinds in hospice care. The U.S. hospice market is projected to grow at a 4.61% CAGR through 2030, fueled by an aging population and shifting patient preferences toward home-based care. VITAS's focus on expanding its footprint—55 hospice programs across 16 states—aligns with these trends. Notably, the company's average revenue per patient per day rose to $207.58, a 221-basis-point increase, highlighting pricing power despite Medicare reimbursement constraints.

However, challenges persist. The Medicare Cap—a regulatory cap on hospice reimbursement for certain diagnoses—remains a drag. Chemed accrued $2.3 million in Q1 related to this limitation, with six of its 34 provider numbers facing significant billing constraints. While the company's proactive management of the cap has mitigated its impact, any policy changes to the cap could unlock additional growth. Investors should monitor Chemed's engagement with the Biden administration, as regulatory relief could be a game-changer.

Roto-Rooter: Stagnation and Strategic Uncertainty

In contrast, Roto-Rooter's Q1 performance was lackluster. Revenue increased 1.8% to $239.5 million, but adjusted EBITDA declined 2.4% to $59.2 million, with margins contracting 108 basis points to 24.7%. The segment's struggles stem from a 6.4% drop in revenue from independent contractors, partially offset by a 7.3% rise in branch commercial revenue.

The plumbing industry, while growing at a 3.2% CAGR, is highly fragmented and competitive. Roto-Rooter's reliance on residential demand—particularly in a high-interest-rate environment—has proven volatile. The company's recent pivot to commercial services (e.g., excavation and water restoration) is a positive step, but it remains unclear whether this will offset declining residential demand.

Chemed's strategic response to Roto-Rooter's underperformance is telling. The company has identified $75–$100 million in potential franchise acquisitions at “reasonable valuations” and is reducing dependence on Google for residential leads. However, the more significant signal is Chemed's openness to divesting the segment entirely. With $404.5 million in undrawn borrowing capacity and a $550 million credit facility, the company has the financial flexibility to explore a spin-off or sale, which could redeploy capital into higher-growth opportunities like VITAS expansion.

Strategic Implications for Shareholder Value

Chemed's capital allocation discipline has historically been its greatest strength. Since 2007, the company has returned $2.84 billion to shareholders via buybacks and dividends. In Q1 2025 alone, it repurchased $29.8 million worth of shares at an average price of $595.15. This aggressiveness, coupled with a debt-free balance sheet, positions Chemed to sustain its shareholder-friendly policies even amid Roto-Rooter's challenges.

The key question is whether the company can decouple its long-term growth from Roto-Rooter's stagnation. Analysts are split: BofA Securities maintains a $708 price target, betting on VITAS's resilience, while Jefferies initiated a “Hold” rating at $500, citing Medicare cap risks. The average price target of $566.88 implies a 20.4% upside from current levels, but this assumes Roto-Rooter's drag is mitigated—either through divestiture or operational turnaround.

Investment Thesis: A Cautionary Bull Case

For long-term investors, Chemed presents a compelling but nuanced opportunity. VITAS's growth trajectory is underpinned by demographic tailwinds, regulatory tailwinds (if the Medicare Cap is reformed), and a disciplined acquisition strategy. The segment's EBITDA margin expansion and cash flow generation provide a strong foundation for shareholder returns.

However, Roto-Rooter's underperformance introduces risk. While the company's strategic options (acquisitions, operational efficiency, or divestiture) are sound, execution is critical. A spin-off or sale could unlock value but may also disrupt short-term earnings. Investors should monitor management's Q2 earnings call for clarity on Roto-Rooter's path forward.

Recommendation: Investors with a five-year horizon should consider a core position in Chemed, leveraging its VITAS-driven growth and strong balance sheet. Those seeking higher conviction should wait for a potential Roto-Rooter-related catalyst—such as a definitive move to divest the segment—before committing. For now, the stock's 20.4% average price target upside offers a compelling risk/reward profile, provided the company navigates its dual-track strategy effectively.