CHE Q1 Earnings Call: Acquisition-Driven Growth and Medicare Cap Strategy Shape Outlook

Healthcare services company Chemed Corporation (NYSE:CHE) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 9.8% year on year to $646.9 million. Its non-GAAP profit of $5.63 per share was 1.5% above analysts’ consensus estimates.

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StockStory’s Take

Chemed’s first quarter results reflected a combination of organic growth and contribution from its recent Covington Health acquisition. Management highlighted that VITAS, its hospice care subsidiary, saw a notable increase in admissions and average daily census, with new programs in Florida and targeted strategies to manage Medicare cap challenges influencing operational performance. Roto Rooter, Chemed’s plumbing and drain services business, also contributed modest revenue growth, driven by commercial segment initiatives and pricing adjustments.

Looking forward, leadership described ongoing efforts to balance growth and margin management, especially as Medicare cap strategies require a shift toward hospital-based short-stay admissions. CEO Kevin McNamara and VITAS CEO Nick Westfall emphasized maintaining above-average growth, both organically and through acquisitions, while monitoring regulatory and reimbursement trends. CFO Mike Witzeman pointed out that cash flow timing issues were temporary, with no underlying collection problems, and stated that future guidance would reflect a more sustainable growth trajectory.

Key Insights from Management’s Remarks

Chemed’s management attributed the first quarter’s results to execution in both its healthcare and services segments, with recent acquisitions and operational adjustments shaping performance.

• VITAS Admissions Expansion: VITAS achieved a 7.3% increase in admissions, driven partly by the Covington Health acquisition and new market entries in Florida, supporting higher average daily census.
• Hospital-Based Admission Strategy: Management continued to shift VITAS admissions toward hospital-referred patients. This approach offers Medicare cap relief but limits potential revenue and margin expansion due to shorter patient stays.
• Roto Rooter Commercial Focus: Roto Rooter’s commercial revenue rose by 7.3% following a strategic focus on larger excavation and water restoration jobs. However, pricing adjustments aimed at driving volume led to a slight decline in EBITDA margin for the segment.
• Operational Staffing Improvements: VITAS reported its eleventh consecutive quarter of licensed healthcare worker growth, enabling the business to support rising patient volumes and maintain service quality.
• Medicare Cap Management: Leadership stressed the importance of proactive Medicare cap management, noting that ongoing changes in admission mix and new program launches are key tools to mitigate regulatory headwinds.

Drivers of Future Performance

Management expects growth to moderate to a more sustainable pace, shaped by regulatory constraints, acquisition integration, and continued operational improvements.

• Medicare Cap Constraints: Regulatory limits on Medicare reimbursement are expected to moderate both revenue and margin growth, as Chemed increases hospital-based admissions to mitigate exposure.
• Acquisition Integration: Continued integration of Covington Health and expansion into new Florida counties are expected to provide incremental growth and near-term Medicare cap benefits.
• Commercial Segment Pricing: Adjustments to Roto Rooter’s commercial pricing model will be refined to balance revenue growth with margin preservation, as management seeks optimal profitability in a competitive market.

Top Analyst Questions

• Ben Hendrix (RBC Capital Markets): Asked for details on Medicare cap management strategy and how it affects long-term growth. Management explained that the current focus on hospital-based admissions provides needed cap cushion but will likely moderate growth rates over time.
• Ben Hendrix (RBC Capital Markets): Inquired about cash flow dynamics and the impact of receivables on working capital. CFO Mike Witzeman clarified that timing of a government payment and a refunded audit account for the temporary increase in receivables, with no collection issues indicated.
• No further analyst questions on the call.

Catalysts in Upcoming Quarters

In the next few quarters, the StockStory team will be monitoring (1) the pace and impact of VITAS’s hospital-based admission strategy as it seeks to balance cap management and profitability, (2) progress on integrating Covington Health and launching operations in new Florida counties, and (3) the effectiveness of Roto Rooter’s evolving commercial pricing structure. Ongoing regulatory developments and reimbursement adjustments will also remain key factors for the business.

Chemed currently trades at a forward P/E ratio of 22.1×. Is the company at an inflection point that warrants a buy or sell? See for yourself in our free research report.

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