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DaVita Seems to be a High-Growth Company

August 20, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at DaVita HealthCare Partners Inc. (DVA), a $15.85 billion market cap company, which operates kidney dialysis centers and provides related lab services in outpatient dialysis centers.

Main drivers

DaVita´s strength in dialysis should be in the future the main driver of earnings potential. When considering a number of measures, such as same-facility treatment growth and the ability to offset reimbursement pressure through internal cost controls, the company is better than competitors.

The performance of the dialysis segment will remain profitable due to the increase in the aging population, rising diabetes rates and obesity epidemic. Also, international expansion is a key driver.

International expansion

Two years ago, the firm acquired the company HealthCare Partners, which operates medical offices in three states. With the deal, DaVita was the largest managed health-care company in the nation. The merger offers competitive advantages over the long term, but it also adds operating risk.

Earlier, the company made others acquisitions like the one of ModernMed (a Wisconsin-based clinic group) and DSI Renal Inc. that allowed the company to increase the number of clients as well as the geographies to operate.

With respect to international markets, Davita has made a service agreement with Fresenius Medical Care, another leading dialysis services and products provider and made a joint venture with Riches Healthcare (RHC).

The company focused on the Asia-Pacific region and for that reason acquired the dialysis operations of Malaysia's Caring Dialysis Centre Group. Other regions for expansion include Saudi Arabia, China, India and Germany.

Medicare and Medicaid

Patients covered by Medicare and Medicaid comprise about 90% of total treatments and about two-thirds of revenue. For each treatment, Medicare pays 80% of the amount set and the patient pays the remaining 20%. In most cases a secondary figure covers all or part of these balances. Obviously government changes to Medicare and state budget constraints on Medicaid constitute a risk for the company.

Revenues, margins and profitability

Looking at profitability, revenue growth by 10.47% but earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.68 vs $1.19). During the past fiscal year, the firm increased its bottom line by earning $2.90 versus $2.73 in the prior year. This year, Wall Street expects an improvement in earnings ($3.63 versus $2.90).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

DVA

DaVita

14.29

AIRM

Air Methods Corp.

16.94

BRLI

Bio-Reference Laboratories Inc.

16.87

 

Industry Median

8.44

The company has a current ROE of 14.29% which is higher than the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at those levels or more, Air Methods Corp. (AIRM) and Bio-Reference Laboratories Inc. (BRLI) could be the right options. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

1408505282703.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 23x, trading at a discount compared to an average of 44x for the industry. To use another metric, its price-to-book ratio of 3.2x indicates a premium versus the industry average of 2.96x while the price-to-sales ratio of 1.3x is below the industry average of 1.56x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $27,683, which represents a 22.6% compound annual growth rate (CAGR).

1408505239741.png

Final comment

As outlined in the article, an aging population, increasing consumer awareness and new advances in technology will be the growth drivers in the next years in the healthcare industry.

The company operates nearly one-third of the dialysis clinics in the U.S. and, together with Fresenius Medical Care, forms a duopoly counting nearly 70% of market share. I think the idea of expanding its dialysis operations into international markets is great although it will take time to gain significant market share.

Hedge fund gurus like Mario Gabelli (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio) and Warren Buffet added this stock to their portfolios in the second quarter of 2014, and I would recommend that investors consider this stock for their long-term portfolios.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

Rating: 3.0/5 (1 vote)

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Comments

asawhneyy
Asawhneyy - 1 month ago

Gabelli talks a lot -CNBC loves him -true marketer BUT----------------------his mutual fund record is average.

Eibe
Eibe - 1 month ago

"With respect to international markets, Davita acquired Fresenius Medical Care, ..."

Could you clarify what you mean by this?

I am sure that Fresenius Medical Care management and stockholders don't know they were aquired by Davita. Surely the author meant to say something different.

stevenmramsey
Stevenmramsey - 4 weeks ago

I'd just say that the conviction in an idea doesn't seem to be very high when the idea headline reads, "DaVita SEEMS to be a High Growth Company" and then not give numbers on historical growth.

I'm not saying you're wrong, but the presentation could be improved.

ovenerio
Ovenerio premium member - 4 weeks ago

Eibe, its ok now. Thanks

ovenerio
Ovenerio premium member - 4 weeks ago

Steven, well actually I mention the revenue growth and the eps comparing them to the previous quarter. Also the ROE evolution in the last 5 years and the stock price performance,too. With the CAGR calculation for the five years period. So I think with this is quite enough, but I appreciate your comment and for further research I will keep your idea on my mind. Thanks!

Bradlewski
Bradlewski premium member - 3 weeks ago

Why have you compared DVA with AIRM & BRLI in your Revenues, margins and profitability section? These healthcare companies are vastly smaller than DVA and do not offer dialysis.

Why not compare DVA with Fresenius (FMS)? Would this not be a far better comparrison

Here is an earlier article from seeking alpha with the comparables:

http://seekingalpha.com/article/1769952-why-davita-is-undervalued-compared-to-fresenius-medical-care

Cheers

ovenerio
Ovenerio premium member - 3 weeks ago

Hi Bradlewski,

I made a table with a more complete comparison for you, but when I paste it here it doesn´t look good. Perhaps I can email it for you if you want.

Please leave your comment:


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