CHEMED CORP (CHE) stock intrinsic value fair value estimate & owner earnings analysis

Chemed owns two businesses. VITAS, the largest U.S. hospice provider, was about 64% of 2025 revenue of $2.53 billion and is paid mostly by Medicare. Roto-Rooter, about 36%, sells plumbing, drain-cleaning and water-restoration services to homeowners and businesses. Both need little capital: 2025 capital spending was $62.8 million against depreciation of $64.8 million. How we measure earning power. We start with cash from operations, remove swings in working capital, subtract stock compensation as a real cost ($38.7 million in 2025 and $52.1 million in 2024), and subtract only the capital spending needed to keep the business running (about $60 million in 2025; the remainder of capital spending is treated as growth). Interest paid is added back because debt is valued separately below. Two items were removed rather than counted as earnings: the $50.3 million Medicare deposit that VITAS paid in 2022 and that was refunded in April 2025 after an administrative law judge ruled in VITAS's favor, and the timing of deferred payroll taxes in 2020 to 2022. On this basis the business produced cash earnings before interest of about $205 million in 2018, $228 million in 2019, $329 million in 2020, $267 million in 2021, $274 million in 2022, $278 million in 2023, $313 million in 2024 and $268 million in 2025. The starting level is the median of the five years 2021 to 2025, $274 million (about $20.80 per share on 13.2 million diluted shares). Those years best describe today's business, including the April 2024 Covenant hospice acquisition. We excluded 2020, when suspended Medicare payment cuts and payroll tax deferrals flattered results, and the earlier years describe a smaller, lower-earning business. Growth check. Cash earnings fell 14.6% in 2025 from the 2024 high ($268 million versus $313 million). Our base case starts from the $274 million level and assumes 2.5% growth in year 1. The reasons the 2025 dip should not repeat are specific and dated: 2025 absorbed an $18.7 million larger Medicare cap charge and $3.9 million more legal expense at VITAS and $5.3 million more casualty insurance at Roto-Rooter, and capital spending rose to $62.8 million from $49.5 million. First-half 2026 revenue was $1,330.8 million, up 5.1%, and operating income was $173.8 million, up 6.7%. CMS also raised hospice payment rates by 2.6% effective October 1, 2025. Growth credited: about 2.5% a year, below the 3.9% annual rate cash earnings actually compounded at from 2018 to 2025, supported by the statutory annual Medicare rate update. Left out: further gains in patient days from population aging or acquisitions, a Roto-Rooter recovery, and a return of VITAS margins, because none is contracted or already under way. The three cases (all discounted at 6%). Bear: cash earnings fall to about $220 million and stay flat. This repeats the 2025 pattern of margin compression once more: VITAS after-tax margin went from 14.2% to 12.5% and Roto-Rooter's from 17.8% to 15.1%, and another step of that size would cost roughly $50 million a year. The Medicare cap charge is the named risk at VITAS (cap-related revenue reductions of $27.2 million in 2025 versus $8.4 million in 2024 and $8.0 million in 2023, with the liability at $30.9 million at year-end 2025), and Roto-Rooter drain-cleaning job counts fell 4.5% in 2025. The business is worth about $3,667 million, it owes net $99.8 million, leaving $3,567 million, or $270.22 per share. Base: $274 million growing 2.5% a year to about $351 million in year 10, then held flat, because the Medicare-certified hospice programs and the Roto-Rooter brand and dispatch network are structural features already in place, but no further growth is evidenced. The business is worth about $5,559 million, it owes net $99.8 million, leaving $5,459 million, or $413.57 per share. Bull: cash earnings return to about $300 million (close to the $313 million reached in 2024, but with normal capital spending) and grow 4% a year, roughly the pace achieved from 2018 to 2025, for ten years to about $444 million, then held flat. The business is worth about $6,838 million, it owes net $99.8 million, leaving $6,739 million, or $510.50 per share. Debt. At June 30, 2026 Chemed had $140.0 million drawn on its revolving credit line and $40.2 million of cash, net debt of $99.8 million, deducted in every case. The line costs SOFR plus 1.00% (as of year-end 2025), close to the 6% we use, so no cost adjustment was made. The $450 million facility was signed in June 2022 for five years, so it must be renewed or replaced by mid-2027. At year-end 2025 nothing was drawn, $404.5 million was available after $45.5 million of letters of credit, and the company was in compliance with its covenants. Even in the bear case the business earns far more than its interest cost. What we tested. We checked the largest one-time item, an OIG-audited $50.3 million Medicare repayment demand against VITAS. The judge ruled in VITAS's favor in February 2025 and the money was refunded, so no liability is carried in any case, and the refund was removed from our earnings measure. We could not put a number on the class-action lawsuits filed after the October 24, 2025 cybersecurity incident at VITAS, since the company cannot estimate the loss, so no amount is included. What would make this analysis wrong: a Medicare hospice rate cut or a tighter payment cap, further cost inflation at VITAS that outruns rate updates, or continued weakness at Roto-Rooter. Change since our previous analysis (bear $157, base $301, bull $414). The higher values come mainly from method, not from the business: we now discount all future cash at 6% rather than 10% to 11%, value the business before its debt and deduct net debt separately, remove working-capital and one-time cash items, and assume 2.5% growth rather than 4%. The bear case is now built from the specific margin pressure seen in 2025. First-half 2026 results were consistent with our earlier view.