Chemed's Q2 2025 Earnings: Can Hospice Growth Outweigh Medicare Headwinds?

Chemed Corporation (CHE) is set to report its Q2 2025 earnings on July 29, 2025, a critical moment for investors to assess whether its home healthcare division, VITAS Healthcare, can sustain its momentum amid regulatory and operational headwinds. The company's stock has underperformed the S&P Healthcare sector by 12% year-to-date, raising questions about whether the market is pricing in long-term risks or overlooking growth catalysts. This analysis explores the key drivers of Chemed's performance and whether its valuation multiples reflect its true potential.

VITAS Healthcare: Growth Amid Medicare Constraints

Chemed's VITAS division, which accounts for roughly two-thirds of its revenue, has been the engine of its success. In Q1 2025, VITAS reported a 15.1% year-over-year revenue increase to $407.4 million, driven by a 11.9% rise in days-of-care and a 3.2% Medicare reimbursement rate hike. Adjusted EBITDA (excluding Medicare Cap impacts) surged 15.9% to $70.3 million, with margins expanding to 17.2%—a 13-basis-point improvement. These figures highlight the demand for hospice services in an aging population, a long-term tailwind for Chemed.

However, the Medicare Cap limitation—projected at $18 million to $25 million for 2025—threatens to cap this growth. The Cap, which restricts payments to hospice providers based on historical utilization, has been exacerbated by two factors:
1. Reimbursement Rate Differential: Florida's consolidated program saw a 5.2% reimbursement increase, exceeding the national 2.9% rate, creating a $25 million revenue shortfall.
2. Community Access Program: While this initiative boosted admissions and revenue, it also accelerated Medicare Cap usage by admitting patients earlier than typical.

The good news is that Chemed has a clear mitigation plan: expanding into high-growth markets like Pinellas County, Florida, where hospice utilization is low but population density is high. Once operational by 2026, this move could reduce Medicare Cap pressures and unlock sustainable margin growth.

Roto-Rooter: Margins Under Pressure, but Not a Dealbreaker

Chemed's plumbing and drain services division, Roto-Rooter, has been less rosy. Q1 2025 saw its Adjusted EBITDA drop 2.4% to $59.2 million, with margins contracting 108 basis points to 24.7%. Residential demand weakness—driven by lower drain cleaning and plumbing jobs—offset gains in water restoration and excavation. While Roto-Rooter's challenges are real, they are not existential. Its 1.8% revenue growth suggests underlying stability, and its 87-year brand equity provides a steady cash flow base. Investors should treat Roto-Rooter as a non-core but necessary part of Chemed's portfolio, rather than a growth driver.

Valuation: Is the Stock Pricing in the Worst-Case Scenario?

Chemed's current valuation reflects skepticism. At a trailing P/E of 17.5x, it trades at a 20% discount to its five-year average and a 15% discount to the S&P Healthcare sector. EV/EBITDA multiples are similarly muted at 10.2x, compared to a five-year average of 12.1x. This compression appears to bake in persistent Medicare Cap pressures and Roto-Rooter's margin struggles.

However, two factors suggest this pessimism may be overdone:
1. Medicare Cap Mitigation Timeline: The Florida expansion and rate differential adjustments could resolve 70% of the Cap issue by 2026. If realized, VITAS margins could rebound to pre-2025 levels, boosting EBITDA by $20 million annually.
2. Structural Tailwinds: The hospice industry is projected to grow at 6% annually through 2030, driven by Medicare enrollment rising to 75 million by 2027. Chemed's scale and geographic diversification position it to capture share in this expanding market.

Investment Thesis: Buy the Dip, but Watch for Catalysts

Chemed's stock presents a compelling opportunity for long-term investors willing to look past near-term Medicare Cap headwinds. The shares are undervalued if the Florida expansion and rate adjustments succeed, which could push VITAS margins back to 18%+ by 2026. Meanwhile, Roto-Rooter's modest growth and stable cash flows add a defensive element.

Key Risks to Monitor:
- Medicare Cap Resolution: If Florida's reimbursement rates remain misaligned, the Cap limitation could exceed $25 million.
- Regulatory Changes: A shift in hospice reimbursement rules or faster adoption of competing services (e.g., palliative care) could disrupt demand.

Actionable Insight: Investors should consider initiating a position ahead of the July 29 earnings call, targeting a 5% downside to current prices. A buy rating is appropriate if management confirms that the Medicare Cap issue is a 2025-only problem and provides a clear path to margin recovery in -text2026.

In conclusion, Chemed's valuation discounts its hospice growth story excessively. While risks remain, the stock offers asymmetric upside for investors who believe in the secular demand for end-of-life care and Chemed's ability to navigate regulatory hurdles.