Chemed's VITAS Bailout: A 20% Rally Hinges on One Segment and Two Cost Lines
A guidance raise built on hospice margin and buybacks, while Roto-Rooter's lead-generation bill keeps climbing — with AI search now written into the footnotes.
CHE · Earnings Call · 2026-10-28
Chemed's VITAS Bailout
Chemed is up 20.1% over the last 90 trading days and sits within 3.5% of its August high, yet still 18% below the March 2024 peak. That is the shape of a name that spent two years de-rating and has now been handed a reason to re-rate. The reason, on inspection, is narrower than the headline: one segment carried the quarter, and the other segment's core problem got slightly worse before it got better.VITAS did the lifting — with a lever it just spent
VITAS revenue rose 12.2% to $457.4M on days of care up 9.4% and a 2.2% rate bump; adjusted EBITDA excluding Medicare cap jumped 31.4% to $92.5M at a 20.2% margin, and adjusted net income climbed 44.7%. The Medicare cap scare that dominated 2025 is genuinely behind them — Chemed ended the 2026 cap year with a Florida cushion north of $34M and expects no billing limitation in the 2027 cap year. That is a clean, verifiable win. But read Joel Wherley's prepared remarks carefully: the margin wasn't manufactured purely by mix. “Full time equivalents ran below our estimated totals for most of the quarter. However, to address continued ADC growth, we ramped up hiring in September 2026.” — Joel L. Wherley, Executive, likely President or COO of VITAS · 2026-10-28 Translation: the fourth-quarter VITAS margin comparison loses an understaffing tailwind. When asked about wages and nurse availability, Wherley was categorical: “we are not experiencing difficulty in hiring” — Joel L. Wherley, Executive, likely President or COO of VITAS · 2026-10-28 — good news operationally, less good as a margin story. VITAS is now a volume story that must pay for its own volume. There is also a new, quieter line item: the contractual allowance rose roughly $3M sequentially because regulators pulled more files. Mike Witzeman put numbers on it — “we saw roughly 12 to 14 million additional revenue being reviewed by the state and federal regulators” — Michael D. Witzeman, Chief Financial Officer (CFO) · 2026-10-28 — and management expects the activity to persist. The Medicare deaths access argument (only about half of Medicare deaths get the hospice benefit) remains the structural upside; the audit cycle is the near-term tax on it.Roto-Rooter: revenue growth of a different quality
Roto-Rooter grew total revenue 7.5% with same-store up 5.5% and every service line rising — but segment EBITDA fell 2.5% to $48.2M and margin compressed 213 basis points to 20.6%. Marketing added $4.3M (free leads down 11.8%, paid up 5%, so 60% of leads are now paid versus 56%), fuel added $1.4M. The cost of customer acquisition is now the single biggest swing factor in the segment. What is genuinely new is how management is choosing to deploy capital into that weakness. Chemed spent $62.5M reacquiring California franchise territories covering 12M people, and $96M on franchise buybacks in 2026. Kevin McNamara was blunt about the arithmetic: “Our first year estimated revenue is somewhere in the $30 to $35 million range. But their EBITDA margin was sub-10% when we purchased them.” — Kevin J. McNamara, Chairman and CEO · 2026-10-28 So the next several quarters of Roto-Rooter revenue growth are effectively purchased at a dilution to margin — a quality-of-earnings wrinkle the 7.5% top-line number hides. Think of it as buying census at a low multiple and paying for it in reported margin.The oldest problem gets a new name
Here is the tension worth flagging. Chemed has been telling this story for two years. In February:In July, Witzeman was still guiding for stability rather than repair: “it is not going to deteriorate from here... But I would also really hesitate to say that we think it is gonna significantly improve from here either.” — Michael D. Witzeman, Executive, likely CFO or similar financial officer · 2026-07-29 And McNamara's July diagnosis was unusually direct: “Google hates the idea of free leads.” — Kevin J. McNamara, CEO or President · 2026-07-29 This quarter the framing shifted. The words on the call were AI search and "Google stranglehold" — neither of which has appeared in this company's keyword history before. The CEO now casts AI as the potential release valve:Certainly in the last seven quarters, that's the case what you're describing.
But when Joanna Gajuk pushed on whether AI assistants will disintermediate the brand, McNamara conceded it is "a little bit speculative" and that it "could certainly hurt us on the margins" — the offset being that the average job is about $1,500 and half of revenue comes from excavation and water restoration, work people do not DIY through a chatbot. That is precisely why average price per job matters more than ever: it has gone from roughly $600 "not too many years ago." The higher the ticket, the smaller the marketing cost as a share of the sale. Rising prices are Chemed's real hedge, not AI.We think that Google stranglehold on the market. it is. It will abate, with AI. Emerging and is emerging strongly.