Chemed: Empire of Care - [Business Breakdowns, EP.215]

Chemed's get-rich-slowly strategy in hospice and plumbing

Chemed is a durable compounder built from two acyclical, asset-light businesses. VITAS benefits from rising deaths and government funding, while Roto-Rooter's emergency work holds up in downturns. Management cares only about growing free cash flow per share and buying back stock. It stays agnostic about which business it owns.

Takeaways

• Chemed pairs hospice and plumbing to compound cash. VITAS is 12% of hospice with $1.6bn of revenue and 15-22% margins. Roto-Rooter is 30-35% of earnings at about 25% EBITDA margins. Both are fragmented, asset-light, people-intensive and acyclical. Chemed has an $8.5bn market cap and net cash.
• Management optimizes free cash flow per share. Since 2004 Chemed generated about $3.7bn of free cash flow, spent roughly $700m on acquisitions and $2.5bn buying back stock, cutting shares from 25m to 15m. Management is agnostic about which businesses it owns.
• VITAS rides a demographic wave funded by government. Deaths are rising from about 2.5m a year before COVID to 3m now and eventually just under 4.5m. Government pays 96% of palliative care bills, 93% through Medicare. 30% of Medicare spending occurs in the last year of life.
• Scale and density give VITAS higher margins. VITAS earns 15-22% margins while the bottom half of the hospice industry earns 6-9%. Hospice has scale benefits, so VITAS prefers population-dense areas. The weaker half of the industry was at risk of going out of business after COVID.
• Roto-Rooter's emergency work keeps it acyclical. About 70-75% of calls are emergency or same-day. It holds 2-3% of the plumbing market and 15% of drain cleaning. Revenue grows about 6% at roughly 25% EBITDA margins, and Roto-Rooter buys franchises to run them with back-office scale.
• Private equity poached Roto-Rooter managers but lost half. Apex and Ben Franklin emerged as plumbing competitors in 2021 and hired away about 20% of Roto-Rooter's general managers. Half returned within one and a half to two years. Roto-Rooter buys franchises for under $10m most years.
• Chemed would sell either business for the right price. Management has conditions for splitting VITAS and Roto-Rooter. CEO Kevin McNamara, 70, rose through Omnicare, and VITAS CEO Nicholas Westfall is the likely successor. Chemed spent $85m on a VITAS acquisition.

A hospice operator's playbook

1. Enter states with favorable rules. Los Angeles County has about 1,900 hospice operators while Florida has about 50.
2. Keep high-acuity spending under 20% of the bill. Patients from hospitals need expensive acute care.
3. Manage the $34,560 per-patient cap, roughly 170-175 days at $200 a day. Assisted-living patients live longer and risk exhausting it.