An aging population, increasing consumer awareness and new technology will remain primary growth drivers in the coming years in the health care industry. With this promising outlook, let's take a look at Buffett´s last trade and try to explain to investors the reasons of this appealing investment opportunity.
On Dec. 10, Warren Buffett bought DaVita HealthCare Partners Inc. (DVA, Financial), a company that operates kidney dialysis centers and provides related lab services in outpatient dialysis centers.
Expanding Through Acquisitions
In 2012 DaVita acquired in a $4.4 billion purchase the company HealthCare Partners, which operates medical offices in three states. With this acquisition, it was consolidated as the largest managed health care company in the nation. But this was not the first deal; in 2011 there were 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. Although it has become highly leveraged, Davita has stated that it plans to quickly de-lever back.
The story is the same in international markets. DaVita acquired Fresenius Medical Care, another leading dialysis services and products provider, and made a joint venture with Riches Healthcare (RHC, Financial). With this new entity (DaVita Taiwan) it plans to provide services to four dialysis clinics. In an important move in the Asia-Pacific region, the company acquired the dialysis operations of Malaysia's Caring Dialysis Centre Group. Other countries involved in the expansionary strategy include Saudi Arabia, China, India and Germany.
Valuation
In terms of valuation, the stock sells at a trailing P/E of 23.1x, trading at a premium compared to an average of 21.1x for the industry. Analysts’ expectations imply a forward P/E of 16.56. To use another metric, its price-to-book ratio of 3.1 indicates a premium versus the industry average of 2.19 and the price-to-sales ratio of 1.2 is above the industry average of 1.1.
Earnings per share (EPS) declined by 14.1% in the most recent quarter compared to the same quarter a year ago. Also, it has demonstrated a positive trend in EPS growth over the past 10 years as shown in the next graph. We include the stock price because EPS often leads the stock price movement.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness.
Final Comment
The firm´s revenue growth has outpaced the industry average of 9.6%. I expect this trend to continue aided by expansion into different regions and strategic acquisitions. Despite having found a major weakness in the result of ROE, the firm has other highlights such as its revenue growth seen before and the increase in stock price during the past year.
For a long-term perspective, I would advise fundamental investors to consider adding DaVita their portfolios as it seems to be a high-growth company.
Hedge fund managers have also been active in the company. Hedge fund gurus like Steve Mandel, Richard Perry, Ron Barron and John Burbank have invested in it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
On Dec. 10, Warren Buffett bought DaVita HealthCare Partners Inc. (DVA, Financial), a company that operates kidney dialysis centers and provides related lab services in outpatient dialysis centers.
Expanding Through Acquisitions
In 2012 DaVita acquired in a $4.4 billion purchase the company HealthCare Partners, which operates medical offices in three states. With this acquisition, it was consolidated as the largest managed health care company in the nation. But this was not the first deal; in 2011 there were 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. Although it has become highly leveraged, Davita has stated that it plans to quickly de-lever back.
The story is the same in international markets. DaVita acquired Fresenius Medical Care, another leading dialysis services and products provider, and made a joint venture with Riches Healthcare (RHC, Financial). With this new entity (DaVita Taiwan) it plans to provide services to four dialysis clinics. In an important move in the Asia-Pacific region, the company acquired the dialysis operations of Malaysia's Caring Dialysis Centre Group. Other countries involved in the expansionary strategy include Saudi Arabia, China, India and Germany.
Valuation
In terms of valuation, the stock sells at a trailing P/E of 23.1x, trading at a premium compared to an average of 21.1x for the industry. Analysts’ expectations imply a forward P/E of 16.56. To use another metric, its price-to-book ratio of 3.1 indicates a premium versus the industry average of 2.19 and the price-to-sales ratio of 1.2 is above the industry average of 1.1.
Earnings per share (EPS) declined by 14.1% in the most recent quarter compared to the same quarter a year ago. Also, it has demonstrated a positive trend in EPS growth over the past 10 years as shown in the next graph. We include the stock price because EPS often leads the stock price movement.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness.
Final Comment
The firm´s revenue growth has outpaced the industry average of 9.6%. I expect this trend to continue aided by expansion into different regions and strategic acquisitions. Despite having found a major weakness in the result of ROE, the firm has other highlights such as its revenue growth seen before and the increase in stock price during the past year.
For a long-term perspective, I would advise fundamental investors to consider adding DaVita their portfolios as it seems to be a high-growth company.
Hedge fund managers have also been active in the company. Hedge fund gurus like Steve Mandel, Richard Perry, Ron Barron and John Burbank have invested in it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
