Recently, DaVita Inc (DVA, Financial) experienced a notable daily loss of 5.48%, yet it has gained an impressive 20.9% over the past three months. With an Earnings Per Share (EPS) of 8.8, investors are prompted to question whether DaVita is modestly overvalued. This article delves into the intrinsic valuation of DaVita, guided by the proprietary GF Value, to determine if the current market price justifies the company's financial metrics and growth prospects.
Company Overview
DaVita Inc (DVA, Financial) stands as the largest provider of dialysis services in the United States, controlling over 35% of the market by both patient and clinic measures. The company operates more than 3,000 facilities worldwide, primarily in the U.S., and treats over 240,000 patients annually. A significant portion of DaVita's U.S. revenue comes from government payers, primarily Medicare, with commercial insurers contributing nearly all of the U.S. dialysis business profits despite representing only about 10% of U.S. patients. This financial structure is crucial for understanding DaVita's revenue streams and profitability.
Understanding GF Value
The GF Value is a unique measure that estimates the true intrinsic value of a stock based on historical trading multiples, a GuruFocus adjustment factor, and future business performance expectations. According to this valuation method, DaVita (DVA, Financial) is currently considered modestly overvalued. The GF Value of $110.46, when compared to the current price of $134.45, suggests that the stock might not offer substantial returns in the near future relative to its business growth.
Financial Strength and Risks
Investing in companies with robust financial health is essential to minimize the risk of capital loss. DaVita's cash-to-debt ratio is 0.04, which is lower than 90.59% of companies in the Healthcare Providers & Services industry. This indicates a potential risk in its financial structure. GuruFocus rates DaVita's financial strength as 4 out of 10, suggesting that the company's financial health could be better.
Profitability and Growth
DaVita has maintained profitability over the past decade, with an operating margin of 13.19% that outperforms 78.37% of its industry peers. The company's revenue growth rate over the past three years has been 11.4%, placing it above 55.98% of competitors. However, its EBITDA growth rate lags behind, ranking worse than 51.16% of industry companies. This mixed growth performance needs to be considered when evaluating the company's long-term value creation potential.
Return on Invested Capital vs. Weighted Average Cost of Capital
An effective way to assess a company's profitability is by comparing its Return on Invested Capital (ROIC) against its Weighted Average Cost of Capital (WACC). DaVita's ROIC of 8.16% exceeds its WACC of 6.89%, indicating efficient value creation for shareholders. This positive spread is a strong indicator of the company's ability to generate returns above its capital costs.
Conclusion
While DaVita (DVA, Financial) exhibits strong profitability and adequate value creation, its modest overvaluation and weak financial strength pose concerns. Investors should weigh these factors carefully against the potential for long-term growth. For a deeper analysis of DaVita and to explore other high-quality investment opportunities, visit GuruFocus High Quality Low Capex Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
