Enhabit, Inc. (EHAB)

Executive Summary / Key Takeaways

• Hospice Segment Is the Growth Engine: Q3 2025 hospice revenue grew 20% year-over-year while segment EBITDA surged 72%, demonstrating that the 2023 case management model investment is creating powerful operating leverage and becoming the primary driver of enterprise value.

• Home Health Faces Structural Reimbursement Pressure: The segment's 0.2% revenue decline in Q3 and CMS's proposed 6.4% payment cut for 2026 represent more than cyclical headwinds—they threaten the core business model and force difficult trade-offs between service quality, branch footprint, and profitability.

• Balance Sheet Repair Creates Strategic Flexibility: Aggressive deleveraging from 5.4x net debt/EBITDA in Q4 2023 to 3.9x in Q3 2025, combined with $86.4 million in available revolver capacity, has restored financial health and enables the first meaningful hospice expansion since the 2022 spin-off.

• Technology Investments Are Margin Defense, Not Growth Drivers: The Medalogix Pulse platform and visits-per-episode management pilot (reducing visits from 15 to 13 per episode) are critical cost-control tools designed to offset CMS cuts, not revenue generators—highlighting the defensive posture required in home health.

• Execution Risk Defines the Investment Case: Success hinges on whether hospice can grow fast enough to offset home health pressures, whether VPE management can be rolled out without quality degradation, and whether the company can navigate the 2026 CMS rule while managing a CEO transition planned for mid-2026.

Setting the Scene: A Two-Speed Business in Transition

Enhabit, founded in 1998 and incorporated in Delaware in 2014, emerged as an independent public company on July 1, 2022, when it separated from Encompass Health Corporation (EHC). This spin-off left the company with 247 Medicare-certified home health locations across 33 states and 115 hospice provider locations across 25 states, concentrated primarily in the southern United States. The separation also burdened Enhabit with $400 million in term loans and a $350 million revolving credit facility, creating immediate balance sheet constraints that have shaped every strategic decision since.

The company's current positioning reflects the divergent trajectories of its two segments. Home health, representing 76% of Q3 2025 revenue, operates in a structurally challenged environment where Medicare fee-for-service volumes have been declining and CMS reimbursement fails to keep pace with inflation. Hospice, at 24% of revenue, benefits from demographic tailwinds and has delivered seven consecutive quarters of sequential census growth. This divergence defines the investment thesis: hospice must grow quickly enough to offset home health pressures while management repairs the balance sheet and defends margins through technology and cost control.

Enhabit competes in a fragmented market against larger players like Amedisys (AMED) with its $2.4 billion in annual revenue and broader geographic footprint, and more specialized competitors like Addus HomeCare (ADUS) focusing on personal care, Pennant Group (PNTG) with regional density, and Ensign Group (ENSG) with its diversified healthcare portfolio. Enhabit's scale—351 total locations and $1.06 billion in guided 2025 revenue—places it in the mid-tier, lacking the bargaining power of national giants but possessing the clinical specialization to compete effectively in high-acuity hospice care.

Technology, Products, and Strategic Differentiation: Defending Home Health, Expanding Hospice

Enhabit's technology strategy serves two distinct purposes across its segments. In home health, technology is fundamentally defensive—a tool to reduce costs and maintain viability amid reimbursement cuts. In hospice, technology supports growth by enabling efficient scaling of the case management model.

The Medalogix Pulse platform represents the cornerstone of home health cost control. This predictive analytics tool, originally developed by the company's former investment in Medalogix (divested in March 2025 for a $19.3 million gain), identifies which patients require higher visit intensity and which can progress with fewer visits. The Q3 2025 launch of a visits-per-episode management pilot in 11 branches reduced average VPE from approximately 15 to 13, with plans to deploy across all 247 home health locations by November 2025. This 13% reduction in visits per episode directly offsets labor cost inflation and CMS rate pressure, but it also risks quality degradation if clinical oversight proves insufficient. The company is adding 10 virtual clinical team members to review clinician overrides, acknowledging that technology alone cannot replace clinical judgment.

In hospice, the 2023 investment in a case management staffing model has created a sustainable competitive advantage. This model aligns clinical resources with patient acuity, enabling the segment to achieve a 12.6% increase in average daily census while reducing cost per patient day by 3.1% in Q3 2025. The result is 72% EBITDA growth on 20% revenue growth—operating leverage that competitors with less sophisticated staffing models cannot easily replicate. All six 2024 hospice de novos are already profitable, collectively generating $0.8 million in revenue and $0.3 million in EBITDA in Q3 2025, demonstrating the model's rapid scalability.

The payer innovation strategy addresses another critical vulnerability. In Q4 2024, 48% of non-Medicare home health visits flowed through payer innovation contracts, up from 22% a year earlier. These contracts typically offer higher reimbursement rates than traditional Medicare Advantage, partially offsetting fee-for-service volume declines. However, the Q2-Q3 2025 renegotiation with a national payer—where census dropped 600 patients and 59% from peak before recovering to 120% of weekly average by September—exposes the fragility of payer relationships. The ultimate low double-digit rate increase effective August 2025 came only after significant patient disruption, highlighting the power imbalance between providers and national payers.

Financial Performance & Segment Dynamics: Evidence of the Two-Speed Thesis

Q3 2025 consolidated results provide clear evidence of Enhabit's divergent segment performance. Net service revenue of $263.6 million grew 3.9% year-over-year, entirely driven by hospice's $10.5 million increase offsetting home health's $0.5 million decline. Adjusted EBITDA of $27 million grew 10.2% with margin expansion of 50 basis points to 10.2%, but this aggregate figure masks segment-level stress.

Home health's $200.5 million in revenue declined 0.2% despite a 3.7% increase in average daily census to 41,451 patients. The disconnect stems from a 3.7% drop in revenue per patient day to $52.60, driven by payer mix shift toward lower-reimbursement non-Medicare patients. Segment EBITDA fell 7.1% to $33.9 million, with margin compression of 160 basis points sequentially due to lower unit revenues and higher unit costs on reduced volumes early in the quarter. The 3.6% increase in total admissions (4.3% normalized for closed branches) shows volume recovery, but Medicare fee-for-service census remains down 1.4% year-over-year—an improvement from the 14.1% decline in Q3 2024, yet still negative. The segment's 56.5% Medicare revenue mix improved only 20 basis points sequentially, indicating limited progress in shifting toward higher-reimbursement payers.

Hospice's performance tells a different story. Revenue of $63.1 million grew 20% on 12.6% census growth and 6.7% improvement in revenue per patient day to $168.20. Segment EBITDA surged 72% to $17.2 million, with margins expanding dramatically as cost per patient day fell 3.1% to $74.90. This combination of volume growth, pricing power, and productivity gains demonstrates the case management model's effectiveness. The segment added 21 direct sales team members year-over-year, an 11% increase broadening referral source reach, and opened two de novo locations in Q3 (six year-to-date, with a seventh in October) on pace for 10 total in 2025.

Balance sheet repair has been equally dramatic. Net debt to adjusted EBITDA leverage fell from 5.4x in Q4 2023 to 3.9x in Q3 2025, with total debt reduction reaching $100 million since Q4 2023 including $15.5 million in Q3 and an additional $10 million in October. This deleveraging reduces annualized cash interest expense by approximately $19 million compared to Q4 2023, freeing cash flow for growth investments. The company generated $27.8 million in adjusted free cash flow year-to-date through Q2, a 51.9% conversion rate, and had $86.4 million available on its revolver at September 30, 2025. While management notes they cannot guarantee continued covenant compliance, exiting the covenant relief period a quarter early in Q1 2025 provides improved pricing and flexibility for tuck-in acquisitions.

Outlook, Guidance, and Execution Risk: Ambitious Assumptions in a Challenging Environment

Management's updated 2025 guidance reflects confidence in hospice momentum while acknowledging home health headwinds. Full-year revenue guidance of $1.058 to $1.063 billion implies Q4 revenue of approximately $265 million, with adjusted EBITDA guidance of $106 to $109 million representing 10% growth at the midpoint. Adjusted free cash flow guidance of $53 to $61 million suggests strong conversion in Q4, but this assumes successful execution of cost initiatives and no further payer disruptions.

The guidance embeds several critical assumptions. For home health, management assumes 4% to 5% average daily census growth for the full year, a significant acceleration from the 0.5% growth seen in the first nine months. This requires not only maintaining the 3.7% Q3 growth rate but expanding it despite the CMS 2026 proposed rule's 6.4% payment cut. The company is evaluating branch consolidations (13 completed through Q3) and outsourcing coding functions (completed in Q1 for $1.5 million annual savings) as mitigation, but these are one-time fixes that cannot offset permanent rate cuts.

Hospice guidance assumes 7% to 8.5% ADC growth, which is a more conservative outlook compared to the 12.6% Q3 performance but still requires continued sales team expansion and de novo execution. The 2026 hospice final rule's 2.6% payment increase provides tailwind, but the segment's 20% revenue growth already embeds favorable pricing. Sustaining this pace depends on maintaining clinical productivity gains while scaling the workforce.

The planned CEO transition in July 2026 adds execution risk. Barbara Jacobsmeyer's announcement creates a leadership vacuum during a critical period when the company must navigate CMS rulemaking, deploy VPE management across all branches, and integrate seven new de novo locations. While the management team is experienced, the timing coincides with peak strategic complexity.

Risks and Asymmetries: How the Thesis Breaks

The CMS 2026 home health proposed rule represents the single greatest threat to the investment case. The 6.4% payment reduction would cut approximately $60 million from home health revenue if applied to current volumes. Management's VPE management pilot can mitigate some of this impact, potentially offsetting 2-3 percentage points of the revenue reduction through visit reduction, but this still leaves a substantial gap that would require deeper branch cuts or service limitations. As Jacobsmeyer stated, "if CMS does not change its extreme position, something will have to give." The company's advocacy efforts alongside the National Alliance for Care at Home may influence the final rule, but the industry's track record suggests limited success in reversing CMS cuts.

Workforce inflation creates a parallel margin squeeze. The company assumes 3% merit increases in 2025, but therapy staff shortages are driving higher market-level adjustments. With labor representing over 50% of costs, even 1% wage inflation beyond plan compresses EBITDA margins by approximately 30-40 basis points. This is particularly acute in hospice, where the 12.6% census growth requires proportional clinician expansion. If productivity gains cannot keep pace, hospice margins will compress from current record levels.

Payer concentration risk remains underappreciated. The national payer that disrupted Q2-Q3 operations represents only 3% of total census, yet caused a 600-patient drop and required months to resolve. A similar dispute with a larger payer could have material impact on both revenue and referral relationships. The company's success in securing a low double-digit rate increase demonstrates negotiating power but also reveals vulnerability to unilateral payer actions.

The VPE management rollout presents execution risk. While the pilot reduced visits from 15 to 13 without quality degradation, expanding to all 247 home health branches by November 2025 requires training hundreds of clinicians and implementing virtual review processes. Any quality slip would trigger regulatory scrutiny and damage referral relationships, undermining the cost savings.

Valuation Context: Discounted Cash Flow Story with Execution Premium

At $9.69 per share, Enhabit trades at a significant discount to home health and hospice peers on cash flow-based metrics. The company's price-to-free-cash-flow ratio of 8.49x compares to Amedisys at 14.13x, Addus at 21.97x, and Pennant at 28.48x. This 40-70% discount reflects the market's skepticism about home health sustainability and post-spin execution challenges.

Enterprise value to EBITDA of 10.87x sits below the 20.86x for Amedisys and 14.13x for Addus, suggesting the market assigns little value to potential hospice growth. The company's $950 million enterprise value relative to $1.06 billion in guided revenue implies a 0.91x revenue multiple, modestly below the 1.38x for Amedisys and 1.57x for Addus but above Pennant's 1.21x.

Balance sheet strength supports the valuation. Net debt of approximately $460 million (3.9x EBITDA) represents a manageable leverage profile, particularly with $86.4 million in revolver availability. The company's 48.98% gross margin exceeds all peers except Amedisys (52.27%), indicating superior cost control in service delivery. However, the negative 1.14% profit margin and -1.69% return on equity reflect home health pressures and post-spin restructuring costs that must reverse for the valuation discount to close.

The key valuation driver is whether hospice can achieve scale sufficient to offset home health declines. If hospice maintains 20% revenue growth through 2026 while home health stabilizes, consolidated EBITDA could reach $125-130 million, placing the stock at 7-8x forward FCF—a compelling multiple for a healthcare services business with demographic tailwinds. Conversely, if CMS finalizes the 6.4% cut and home health EBITDA falls 15-20%, the company's leverage could rise above 5x again, compressing the multiple and limiting strategic options.

Conclusion: Hospice Must Outrun Home Health's Decline

Enhabit's investment thesis centers on whether hospice growth can outpace home health deterioration while management repairs a balance sheet damaged by the 2022 spin-off. The Q3 2025 results provide encouraging evidence: hospice delivered 72% EBITDA growth on 20% revenue gains, deleveraging progressed to 3.9x, and the VPE management pilot showed early cost control success. However, the CMS 2026 proposed rule's 6.4% home health payment cut represents a structural headwind that technology and efficiency gains alone cannot offset.

The stock's 8.49x free cash flow multiple embeds significant pessimism about home health's future, creating potential upside if hospice momentum continues and management executes on branch optimization. Yet this remains an execution story, not a turnaround. Success requires flawless rollout of VPE management, continued hospice census gains, and navigation of a CEO transition during peak strategic complexity. For investors, the critical variables are the final CMS 2026 rule's severity and hospice's ability to maintain its 12.6% census growth rate. If hospice can scale to 30% of revenue by 2027 while preserving its 27% EBITDA margin, the company can survive home health's structural decline and justify a re-rating toward peer multiples. If not, the balance sheet repair will have merely delayed, not prevented, a more difficult restructuring.