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Why Warren Buffett's Successor Likes DaVita So Much

December 12, 2013 | About:
noideahow

noideahow

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Warren Buffett asked Ted Weschler to be one of his two investment successors at Berkshire Hathaway (BRK.A)(BRK.B). At the time DaVita (DVA) was and continues to be even today, Weschler's second largest holding. Currently 34% of his portfolio at Berkshire (BRK.A, BRK.B) consists of DaVita. Buffett wouldn't have asked Weschler to be his successor if Buffett himself didn't think DaVita was a great idea.

This article hopes to explain why DaVita is such an attractive investment.

1. DaVita P/E

DaVita's P/E of 23 is misleading. First, DaVita took a large charge of $397 million for a legal settlement with the government this year. Second, DaVita has acquired hundreds of dialysis clinics over the years. As a result it has high amortization charges. At this point, I quote from Buffett's 1983 shareholder letter: "In analysis of operating results - that is, in evaluating the underlying economics of a business unit - amortization charges should be ignored. What a business can be expected to earn on unleveraged net tangible assets, excluding any charges against earnings for amortization of Goodwill, is the best guide to the economic attractiveness of the operation. "

From this perspective, DaVita is extremely undervalued. It reported free cash flow of $1.24 billion over the last 12 months (i.e. operating cash flow of $1.49 billion — maintenance expenditure of $245 million).

Dialysis clinics require very little maintenance expenditure.

With 213 million shares outstanding, that is $5.84 free cash flow per share. Thus, DaVita's Price/Free Cash Flow is just 10.4 (60.63/5.84).

2. DaVita Return on Capital

DaVita has more than $11 billion of intangible assets ($8.9 billion of goodwill and $2.1 billion of amortizable intangibles). This works out to $52 per share. This is due to its acquisitions of other dialysis operators over the years. Again, we refer to Buffett's 1983 letter that says that return on tangible assets is what matters. If we back out the $52 per share of intangible assets, that leaves an enormous return on capital.

3. Medicare Reimbursement Risk

It has been an implicit understanding that private insurance pays several times more than Medicare per treatment while Medicare pays below cost of care. This is because private insurance needs to pay only for the first 30 months after which Medicare takes over irrespective of age. As a result all of DaVita's profits come from private insurance, though most of its revenue is Medicare.

Weschler has known the dialysis industry for nearly 30 years. He worked for Peter Grace who was the CEO at WR Grace. WR Grace acquired a dialysis company in the 1980s and sold it to Fresenius in the 1990s.

When the Center for Medicare Services (CMS) announced an intent to cut dialysis payments by 9.4% in July, the stock dropped. Weschler bought more DaVita then. Just before CMS was to announce its final decision on Nov. 22, Weschler bought 3.7 million shares of DaVita between Nov. 6 and Nov. 8. Weschler bought another 1.3 million shares last week.

The reason Weschler bought confidently is that he knew that CMS wouldn't be able to cut. Indeed, CMS announced on Nov. 22 that it would keep dialysis rates in 2014 and 2015 the same as 2013. Why? Because a lot of dialysis clinics with a higher concentration of Medicare patients would close down if it cut.

Without dialysis, patients die very fast. Dialysis is unique; it's the only treatment that Medicare covers irrespective of age because its indispensable.

DaVita is the lowest-cost operator which means that there are a lot of other operators who insulate DaVita from Medicare cuts.

205 Congressmen from both parties wrote a blunt letter to CMS asking it not to cut. That letter can be found at this link

http://dropbox.norglobe.com/files/ESRD%20final%20letter---1217271.pdf

4. DaVita Competitive Advantage

Some of DaVita's competitive advantages are:

a) It is the most efficient dialysis operator with per-treatment costs of just $217.

b) Its large scale (it is a duopoly together with Fresenius) gives it cheaper drugs, dialysis equipment and other supplies. Smaller dialysis operators would have to pay more to their suppliers.

c) Its large number of facilities all over the country give it negotiating leverage with insurance companies. Insurance companies cannot cut their payments to DaVita because without DaVita or Fresenius, patients may have to drive hundreds of miles for treatment. And most importantly, DaVita and Fresenius don't get into price wars with each other. As the DaVita CEO said, cutting prices is not "constructive for the community."

d) These advantages have allowed Davita and Fresenius to acquire hundreds of small dialysis clinics over the years. Thus, their advantages have only increased in a virtuous, self-feeding circle.

5. DaVita Growth Opportunities

DaVita acquired HealthCare Partners last year. The business model of HealthCare Partners is to provide "fee-for-value" as opposed to "fee-for-service." This provides better quality health care at lower cost. Currently, HealthCare Partners does business in five states. In the Capital Markets Day presentation on Dec. 9, Kent Thiry, the DaVita CEO, said that they plan to expand into two more states in 2014, three states in 2015 and a lot more in 2016. He called the growth opportunities "mouth-watering." Compared to dialysis whose growth opportunity he describes as solid, Kent Thiry says the growth opportunity for HealthCare Partners is huge.

Another growth avenue is VillageHealth. DaVita wants to take over all medical care for dialysis patients, not just dialysis. Medicare spends $88,000 per year per dialysis patient of which $33,000 goes to dialysis and the remaining $55,000 goes to other things. Because dialysis needs to be performed three times a week for up to four hours each time, DaVita can expand into other areas easily due to patient availability.

Valuation

DaVita is such a screaming bargain that we need not slice and dice it finely. Just consider the fact that dialysis patient growth has been 4% over the last decade. Add 1% for inflation, giving 5% guaranteed long-term growth. With a 10% discount rate, and using $5.84 FCF per share, the terminal value itself would be 5.84/(0.1 - 0.05) = $116.8. This is not even factoring in the greater expected growth at HealthCare Partners and other ventures such as VillageHealth and DaVita Rx.

Management

DaVita has an outstanding CEO. Kent Thiry took over as CEO of DaVita in October 1999 (then called Total Renal Care).

The stock at that time was trading at $6 per share with 81 million shares outstanding. Today the same company has 213 million shares outstanding at $61 per share. That is a compounded return of 26% per annum for 14 years.

Rating: 4.7/5 (29 votes)

Comments

Greg Speicher
Greg Speicher premium member - 9 months ago
Thanks for the nice write-up. Can you briefly walk through how you separated maintenance capex from growth capex?
noideahow
Noideahow - 9 months ago
Thanks for reading the article. I didn't separate them. If I had included only the capex required to handle 4% patient growth that I assumed in the article, it would look even more undervalued, but I didn't find that number. In the first 9 months of 2013, they have already added 8.5% more patients than they had at the end of 2012. At the end of 2012 they had 153,000 patients and at the end of Q3 2013 they reported 166,000 patients. They should end the year with at least 10% more patients than they started out with. I got the last 12-month cash flow numbers from the very last slide of their latest Capital Markets presentation: http://phx.corporate-ir.net/phoenix.zhtml?c=76556&p=irol-EventDetails&EventId=5061167 For pure maintenance, I guess the numbers from slide 71 of their 2007 Capital Markets presentation are more accurate - they need less than 2% of revenue for maintenance. http://library.corporate-ir.net/library/76/765/76556/items/269863/DVA2007%20Capital%20Markets%200711013_master.pdf
rocco 78
Rocco 78 - 9 months ago
Davita has not amortization charges, in fact from 2012 financial report: During the year ended 2012, the Company did not record any goodwill impairment charges. As of December 31, 2012, none of the goodwill associated with the Company’s various reporting units was considered at risk of impairment. can you please clarify your statement?
batbeer2
Batbeer2 premium member - 9 months ago
Thanks for an interesting article and your response to Greg's question. I have a couple:

>> a) It is the most efficient dialysis operator with per-treatment costs of just $217.

Where do you get that number and is there any way of breaking it down? If memory serves, Medicare reimbursements are now a lump sum per treatment which includes some related drugs (EPO).

Does the $217 include DVA's cost of EPO?

I would be surprised if it did.

>> b) Its large scale (it is a duopoly together with Fresenius) gives it cheaper drugs, dialysis equipment and other supplies. Smaller dialysis operators would have to pay more to their suppliers.

Fresenius is a major supplier of equipment and supplies within the space (Davita buys from Fresenius). So, one could argue that Fresenius has an advantage over Davita.

Thoughts?
noideahow
Noideahow - 9 months ago
Hi Rocco78 DaVita has amortizable intangibles too. These are described on Page 48 of the 2012 10-K. At the time Buffett wrote that letter in 1983, Goodwill used to be amortized over 40 years, but then they changed the accounting rule such that Goodwill need not be amortized. But we still need to remove Goodwill to calculate return on Capital.
noideahow
Noideahow - 9 months ago
Hi Batbeer Patient care costs do include EPO cost. The patient care cost has been drifting down ever since the bundled payment was introduced. In 2012 it was $213 in 2010 it was $232. This excerpt is from the 2011 10-K. "The dialysis and related lab services patient care costs on a per treatment basis were $217 and $232 for 2011 and 2010, respectively. The $15 decrease in the per treatment costs in 2011 as compared to 2010 was primarily attributable to a decline in the intensities of physician-prescribed pharmaceuticals, continued cost control initiatives, partially offset by higher labor and benefit costs, and higher EPO costs."
noideahow
Noideahow - 9 months ago

Hi Batbeer W.r.t your second question, this industry doesn't operate in the cut-throat mode. 1. For example, all dialysis operators unite in lobbying the government (this seems to be required almost every year). Reading the earnings calls for the last several years, they just don't talk about gaining on other dialysis providers - such cut-throat activity would be destructive long-term and these companies seem to be very aware of that. 2. It is indeed the case that Fresenius supplies a lot of stuff to DaVita. But there are transactions in the opposite direction too - Fresenius uses DaVitaRx. 3. DaVita sold its international assets to Fresenius in 1999. 4. In its latest earnings call, Fresenius said "Q2 to Q3, we saw a $2 increase in cost per treatment from $293 per treatment from $291." Of course, the "cost" here would be "revenue" somewhere else in Fresenius's financials. Therefore its not an apples-to-apples comparison with DaVita's cost. 5. DaVita has a unique company culture - you can search for "Kent Thiry" on Youtube.

batbeer2
Batbeer2 premium member - 9 months ago
I missed that in the 10-k, my bad.

Thanks!
noideahow
Noideahow - 9 months ago
One more example of cooperation among these dialysis providers is lobbying the government for the ESCO program. They want to take over all medical care for dialysis patients (many of these patients are quite sick with comorbidities like heart disease and hypertension).
rocco 78
Rocco 78 - 9 months ago
hi Noideahow i do not agree with your analisys: Buffett says correctly that you have to adjust P/E in order to not consider amortization charges; in the case of davita, amortization charges are 0, so the P/E remains the same (23). as regards Operating cash flows, if you compare them against Price you are not comparing apples with apples: operating cash flows are unlevered so you should compare them to the Enterprise Value (mkt cap + net Debt) of the company. hope you agree on this. Thank you Rocco
tnkenyon
Tnkenyon premium member - 9 months ago
Good writeup, but I don't agree that you can just remove goodwill from capital. It represents part of the capital spent on acquisitions (the premium over book). So there was capital employed, much like a capital expenditure. It needs to be counted in ROIC calcs. Otherwise, one could make a ton of overpriced acquisitions of lousy software companies with little tangible assets, yet rack up huge returns on capital, because all the money I wasted is "intangible". I was at the shareholder meeting when Brk bought Gen Re. There I asked Buffett about goodwill amortization's validity - (it was still being amortized at that time) - and he said amortization was silly, because it assumes the asset loses value over time. But to the extent that goodwill represents the value of brands, customer relationships, etc it is more likely to gain value. So he was against amortizing goodwill, but I don't think he would agree it is not part of the capital base.
noideahow
Noideahow - 9 months ago
Tnkenyon, Return on tangible assets is an indicator of how much money can be taken out of a business going forward (what Buffett calls "owner earnings"). A business with a high return on tangible assets will require very little investment of the earnings back into the business. Therefore, as a buyer of a business that should be the only thing that concerns us - how much money should we put back in each year and how much money can we take out. For example, suppose there is a business with stock price $100, EPS $8, book value $10, no liabilities, no intangibles, return on tangible assets 80%. If I buy it at $100 per share and mark Goodwill as $90, does it mean that going forward the capital requirements for the business have changed? No. Yes, goodwill has value - but it can bear no relation to the goodwill figure on the balance sheet. It may be more or less, may grow or shrink. W.r.t your example of acquisitions of software companies: ROC is not useful while evaluating a software company. For a software company, ROC would either be very high or not exist at all. Even if it is high, it may disappear in no time. But purely from an accounting point of view, if the acquisitions were lousy, there should eventually be a goodwill impairment charge that shows up as negative earnings. Return on tangible assets is useful for stable businesses.
noideahow
Noideahow - 9 months ago
Rocco, DaVita has amortization charges of $342M in 2012 IIRC. W.r.t unlevered vs. levered, I would expect a company like DaVita to never pay its debt. It doesn't make sense for DaVita to pay back any of its debt. It will continue to use debt to grow faster and bigger. Its operating income in millions for the 8 consecutive quarters in the 2008-2009 period, starting from Q1 2008 are: 196, 206, 208, 212, 221, 236, 245, 239. They will never have a problem servicing debt, their profitability was unaffected by the severe recession. We have to decide how much we want to pay for its equity - its equity grows much faster due to its use of debt. Stated another way, should Davita stock trade at a higher price if it never took on any debt. In my opinion, No. Because equity would grow much faster with the usage of debt. The debt you see before 2012 was used for the big acquisition of Gambro - and they never paid it back.
dipsy
Dipsy - 9 months ago
I think Rocco has a point. The capital structure needs to be taken into account. "Stated another way, should Davita stock trade at a higher price if it never took on any debt. In my opinion, No. Because equity would grow much faster with the usage of debt." Probably a better way to is compare DVA w/o debts and the current DVA (both are exactly the same expect debts). The former should sport a higher P/E bc it has the potential to add debts to boost its earnings and a stronger balance sheet.
coryashpt
Coryashpt premium member - 9 months ago
The assumed patient growth rate is 4%,but the current patient mortality rate is 13.9%. What am I missing here? Sounds like a ticking time bomb.
noideahow
Noideahow - 9 months ago
What I meant is would you pay a higher stock price if DaVita promised to never take on any debt. No would be the answer. You would prefer that it use debt to grow equity faster because its cash flows are 100% recession-proof. Another example is Comcast - it has never paid off its debt and will never do so. Over the last 30 years, would it have been wise to penalize it when the EV/EBITDA was high. No, because it probably meant that the equity was about to jump. It doesn't make sense to expect to pay a lower stock price for companies like DaVita or Comcast when the debt ratio goes higher. Because the equity would jump and bring the debt ratio lower - it would then be too late to buy the stock. EV/EBTIDA would make sense for a private equity company that is about to buy an under-leveraged company and load it up with debt. But for a retail investor, it doesn't make sense to judge the stock price based on the current debt ratio for recession-proof companies like DaVita - buying the equity when the debt level is higher is the better course.
rocco 78
Rocco 78 - 9 months ago
Noideahow, financial debt is financial debt: otherwise can you explain to me what is the difference between Enterprise value and Equity Value ? for your evaluation is irrelevant if Davita has 8 bln usd or 0 financial debt?
batbeer2
Batbeer2 premium member - 9 months ago
Debt is debt and equity is equity. Adding the two together will give you less information, not more.

It's like adding apples and oranges. I'd rather know the number of apples and the number of oranges. Those two numbers can help me make a better decision. Adding them together and using the result as a basis for anything important will get me into trouble.

Either a company can service its debt with ease.... or it can not. If it can, the debt is irrelevant. Yeah, you need to deduct any interest expense from owner earnings but FCF as reported is after interest.

That takes care of the interest so you can then move on to the (often impossible) task of estimating maintenance capex. Luckily for us, Davita is very light on the assets. Even if you make a huge error in estimating maintenance capex, it has very little effect on your estimate of owner earnings.

FWIW, I think 20% of net PP&E is a reasonable estimate of maintenance capex for DVA. I'll call it $300m per annum.

With cash from ops of some $1500m that gets me owner earnings of $1200m.

Again, that is after DVA has paid the interest on its debt.

While $400m of interest expense before owner earnings of $1200m is nontrivial, in my book this still qualifies as "serving its debt with ease".

Just some thoughts.
graemew
Graemew - 9 months ago
Batbeer, that $400m of interest expense is at current rates. Current rates are rock bottom low. Multiply current rates by three to get more normal historical rates and interest expense = owner earnings. Not that I honestly expect interest charges to triple in the medium term. Warren Buffett seems to really hate debt more than anything else, so it puzzles me that he is OK with Davita....unless they buy the whole company lock stock and barrel and then use their ton of cash to get rid of the debt. In addition, companies that expand earnings by serial acquisitions one day wiill run out of companies to buy...so then where does that fantastic earnings growth come from?
batbeer2
Batbeer2 premium member - 9 months ago
Yeah..... interesting points.

You look at DVA's debt and you'll find most of the bonds don't mature until 2022. It should be interesting to see what they do with the loans though. Either they retire them quickly or they roll em over into long-term bonds to deal with the risk you point out.

This is precisely the kind of information lost when relying on EV.

Of course Berkshire itself is a serial acquirer. It makes sense if the management of the acquiring company somehow adds value to the company that is being acquired. Presumably, Buffett (or at least Wechsler) thinks highly of Thiry.
noideahow
Noideahow - 9 months ago
Buffett doesn't hate leverage - else he would never buy banks. He has made money through leverage - e.g. his insurance company. If you look at Berkshire's balance sheet right now, you will find a ton of liabilities. Buffett is wary of leverage when used by the wrong people. As Munger recently said, Berkshire made money by borrowing money at 3% and investing it at 13%. What they say is that leverage magnifies defects - so make sure there are no defects. DaVita is the safest company you can find w.r.t leverage - even Buffett's utility companies have lower electricity usage in a recession. But DaVita grew every quarter in the latest Great Recession - when someone's kidney stops working, they need dialysis immediately and every week for the next several years until they die. Besides, DaVita is pretty lightly leveraged - its EBITDA in 2012 was $2.4 billion. That makes the Debt/EBITDA ratio 3.4. That is not high at all for a recession-proof company like DaVita.
noideahow
Noideahow - 9 months ago
Rocco, think about what a private equity company does. They take an under-leveraged company private, load it up with debt and then assign themselves equity AFTER loading it up with debt. Thus, they make money on the equity AFTER they take the debt to a high level. As a retail investor, how can one best imitate a private equity company. If we focus on EV/EBITDA, we would only be looking at the input side of private equity - not the output side.
rocco 78
Rocco 78 - 9 months ago
noideahow, look at modigliani miller theorem. davita valuation should not be considered without also considering the capital structure of the company.
noideahow
Noideahow - 9 months ago
Regarding interest rates, an annual inflation adjustment was introduced into the Medicare dialysis rates when the bundled payment was put in place. This was in 2011. Therefore, if higher inflation moves interest rates up, then Medicare reimbursement should also go up correspondingly. Every year CMS is supposed to increase dialysis rates at the rate of (cost inflation - productivity increase). Not sure how they measure the cost - but they are supposed to take into account labor, rent etc.
noideahow
Noideahow - 9 months ago
In Berkshire's 2012 annual report, we find for the Railroad, Utilities and Energy segment, 2012 revenues of 32.5 B and expenses of 25.5B. Correspondingly, debt and other liabilities for this segment are 49B. Note that the railroad business is deeply cyclical due to high fixed costs and unionized labor, therefore leverage at railroad companies better be restricted. Even utilities are exposed to recessions - industrial electricity usage goes down during recessions. Utilities and railroads have very high capital requirements. Not only is DaVita 100% recession-proof, it also has very low capital requirements.
batbeer2
Batbeer2 premium member - 9 months ago
>> The assumed patient growth rate is 4%,but the current patient mortality rate is 13.9%. What am I missing here? Sounds like a ticking time bomb.

That's 4% growth after 14% mortality.

The growth is not slowing down while the mortality is. I believe the US still has a some way to go before it catches up with the EU where mortality rates for ESRD patients are lower.

In short, there is room to grow.
noideahow
Noideahow - 9 months ago
I forgot to mention that their private insurance contracts are also indexed to inflation. Their leverage was much higher when they acquired Gambro in 2005 - it was 5.2x EBITDA - one-and-a-half times more than what it is today. My guess is that they will increase their leverage from 3.4x EBITDA as they expand HealthCare Partners from 5 states to all 50 states. Thiry says the only thing holding back the expansion of HealthCare Partners is the lack of deal makers at DaVita. They are working on getting more business development people for expansion.
Nadeem
Nadeem - 8 months ago
Excellent article. Thank you Noideahow. I was avoiding this stock because of high P/E ratio, I appreciate your explained the reason. Nadeem
AlbertaSunwapta
AlbertaSunwapta - 8 months ago
Interesting 2009 article...

http://www.denverpost.com/emailed/ci_12830453

And this...

Rival Claims DaVita Monopolizes Dialysis

http://www.courthousenews.com/2012/04/04/45301.htm

From Antitrust Property Law, April 3, 2013

Antitrust Claims Proceed Against Dialysis Service over Alleged Monopolization of Markets in New York and Massachusetts

http://www.dailyreportingsuite.com/antitrust/news.php?post=news/ALD20130403.html

DaVita eyes new markets with $4.4 billion Healthcare deal

December 15, 2013 • 06:45AM

Excerpt:

"...has agreed to buy privately-held HealthCare Partners for about $4.42 billion in cash and stock to expand into new markets to help offset potential revenue pressures in its main business."

http://en.terra.com/news/news/davita_eyes_new_markets_with_4_4_billion_healthcare_deal/act479451
batbeer2
Batbeer2 premium member - 8 months ago
>> Rival Claims DaVita Monopolizes Dialysis

>> Antitrust Claims Proceed Against Dialysis Service over Alleged Monopolization of Markets in New York and Massachusetts


Last time I checked, monopolies weren't illegal.

Google, Coca-cola, Sigma-Aldrich or for that matter Shimano are not illegal. They're just very good at what they do. DaVita negotiating the best price with Amgen for EPO or offering rock-bottom prices to healthcare insurers are good things. A competitor who's unable to match this adds no value and has no reason to exist.

Many small dialysis centers are arguing that Medicare should pay more or else they'll be out out of business. That would be bad for competition which in turn would cause prices to go up.

Their argument boils down to "If Medicare doesn't raise prices, prices will go up". That's nonsense.
AlbertaSunwapta
AlbertaSunwapta - 8 months ago
^ I'd say it depends on how the monopoly power is achieved. When they aren't illegal they are subject to regulatory risk, which in turn should affect the desired degree of margin of safety. Regarding the articles, they provide insight into the nature of the business beyond simple ratio analysis.

On the 4% growth rate, has anyone done any estimation of market growth from the aging baby boom population?
noideahow
Noideahow - 8 months ago
All these are good points. My take is that the government loves someone like DaVita. Its like the Wal-mart of dialysis. Having more Macy's and Nordstrom-type entities wouldn't lower dialysis costs for CMS. DaVita keeps the federal budget deficit down. I believe dialysis was the first treatment that CMS has used a bundled payment on. CMS is moving towards bundled payments for everything to cut costs - i.e. they want to move away from fee-for-service because nobody has any incentive to save money in fee-for-service. Dialysis is a success story for CMS. DaVita claims that its pilot project - VillageHealth saves 15% of non-dialysis expenditure - that is 15% of 7-8% of the Medicare budget - Thiry says this is awaiting the government's attention. This NY Times link is about the largest hospital in San Francisco - technically a "non-profit" hospital, but one which charges exorbitant prices and is building a new, fancy $2.7B building: http://www.nytimes.com/2013/12/03/health/as-hospital-costs-soar-single-stitch-tops-500.html?_r=0 "And, like any business, many hospitals try to do fewer services that are not well paid. In 2012, over loud patient protests, California Pacific Medical Center outsourced its kidney dialysis unit to DaVita Health Care Partners, a commercial company, citing decreasing reimbursement."
noideahow
Noideahow - 8 months ago
I regret not buying Mastercard because of the anti-trust scare a few years ago (it didn't scare Todd Combs though). Just last week, Mastercard and Visa finally made the largest-ever anti-trust settlement, but their stocks have soared over the last few years. Similarly there was regulatory fear around Moody's a few years ago. The Mastercard/Visa and Moody's/S&P duopolies don't lower costs for anyone. In contrast, the Davita-Fresenius duopoly lowers costs for taxpayers. I would strongly recommend Thiry's business school talks on Youtube. He invented a unique company culture - I haven't seen or heard anything like that. The government is lucky to have someone like Thiry to lower its costs.
twall245
Twall245 - 8 months ago
Random question, but where did you get the stat that 34% of Ted's portfolio was DVA? Thanks.
AlbertaSunwapta
AlbertaSunwapta - 8 months ago
Edwards Deming made some great points on the benefits of monopolies. Well worth reading. (I owned MasterCard until about a year ago and currently own DVA. DVA being almost a pure copycat action on my part. Not sure if selling MasterCard was wise but competitive threats are rising fast. )
vgm
Vgm - 8 months ago
Twall -- according to a recent comment from Buffett, Weschler and Combs each has $6.5B to manage. Berkshire now has some 36.5M shares of DVA which is around $2.2B at today's price, making it 34%.

It's perhaps worth mentioning that Weschler has a personal holding of around 2.2M shares of DVA which adds to his conviction about the company.

Noideahow -- many thanks for the superb discourse/discussion on DVA. I agree the videos on Thiry and the company philosophy are well worth viewing. He's a remarkable and outstanding individual - perhaps a new Outsider in the making. DVA is one of my largest holdings. Being a partner alongside people of the caliber and vision of Thiry and Weschler is hugely reassuring.
batbeer2
Batbeer2 premium member - 8 months ago
>> On the 4% growth rate, has anyone done any estimation of market growth from the aging baby boom population?

I think the leading indicator for kidney issues is diabetes. If you want to get an idea of the number of dialysis patients in 10 to 20 years you should probably look at the trend for diabetes today.
coryashpt
Coryashpt premium member - 8 months ago
Can we quantify the risk of advances in the treatment of diabetes slowing the rate of people acquiring end stage renal disease? Could that 4% growth rate actually decrease?
batbeer2
Batbeer2 premium member - 8 months ago
>> Could that 4% growth rate actually decrease?

Sure it could.

Having siad that, the advances thus far haven't done much to slow the rate.

We have:



  • aging,

  • Increased incidence of diabetes.

  • Population growth 

  • Industry consolidation....


these are current trends all driving DVA's growth.

On the other hand, I can imagine dozens of reasons why the growth could slow. Frankly the market is now betting it will.  It is fair to say the price now implies " this time is different".

While that may be true, I have no evidence for that.

Just some thoughts.  
tnkenyon
Tnkenyon premium member - 8 months ago
Noideahow you say: "suppose there is a business with stock price $100, EPS $8, book value $10, no liabilities, no intangibles, return on tangible assets 80%. If I buy it at $100 per share and mark Goodwill as $90, does it mean that going forward the capital requirements for the business have changed? No." But the acquirer now has an roic of 8% on that acquistion. He just spent $100 to get $8 in earnings. If you only look at returns on tangible equity, the acquirer shows 80% return on that acquisition - as if the $90 premium over book that he spent simply doesn't matter. Heck, it wouldn't matter if he spent a $300 premium over book  - same tangible return even if his return on the investment is now<3% (that is the point I was trying to make with the software co example). It does matter if you are trying to determine the attractiveness of the acquirer's business. That is why any good calculation of the capital base, as used to determine ROIC, includes goodwill and adds back any accumulated goodwill amortization.
noideahow
Noideahow - 8 months ago
Tnkenyon, you missed Buffett's point. He is not talking about Year 0 of the acquisition. He is talking about Year 5 or Year 25 after the acquisition - assume that earnings have doubled without requiring any additional capital. How much of the earnings have you retained and what can you sell the business for 5 or 25 years later? Compare this to another example that needs significant capital to double earnings - 5 years later how much of the earnings have you retained and what can you sell the business for?

Please leave your comment:


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