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James Li
James Li
Articles (611)  | Author's Website |

Warren Buffett’s DaVita Pares Early Gains on Lower Kidney Care EBIT Guidance

Shares of kidney dialysis provider traded over 8% higher at market open on vote against revenue cap

DaVita Inc. (NYSE:DVA), a major kidney dialysis provider, tumbled approximately 4.3% in post-market trading on Wednesday, cutting into the 8% gain at market open on a vote rejecting a proposition to cap revenues dialysis providers can earn through the rates charged to privately insured patients.

The Denver-based company reported consolidated revenues of $2.847 billion, slightly lower than the consensus estimates of $2.9 billion. Despite this, adjusted earnings of 56 cents per share significantly underperformed the consensus estimate of 87 cents per share.

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Company lowers kidney care operating income guidance

DaVita Kidney Care CEO Javier Hernandez said on the earnings call that management lowered the high end of the operating income guidance from $1.6 billion to $1.525 billion on two key factors: the higher advocacy charges and the acceleration of equity awards for retirement policies. During the question-and-answer sessionn, Hernandez and DaVita Chief Financial Officer Joel Ackerman discussed with analysts from Bank of America Corp. (NYSE:BAC) and Goldman Sachs Group Inc. (NYSE:GS) that the lowered guidance reflected approximately $20 million in higher advocacy costs, between $20 million and $35 million in headwinds stemming from DaVita Rx and Medicare bad debt and approximately $23 million in losses due to changes in the retirement policies regarding equity awards.

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GuruFocus placed DaVita’s 3.5-star business predictability rank on watch on several red flags, which include a three-year revenue decline rate of 1.20%, which underperforms 78% of global competitors. Additionally, the company’s operating margin is near a 10-year low of 12.88% despite outperforming 78% of global medical care companies.

Stock pares early gains from landmark vote during midterm elections

Despite trading near an intraday high of $79.11, up 14% from the previous close of $69.26, DaVita pared the gains on lower-than-expected revenues and weak guidance in kidney care operating income.

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The Dow closed over 500 points higher, spurred by strong gains from UnitedHealth Group Inc. (NYSE:UNH) and Bill Gates (Trades, Portfolio)’ Microsoft Corp. (NASDAQ:MSFT). The health care, technology and consumer discretionary sectors gained over 2.5% on midterm election results coming in as expected: Democrats won back the House of Representatives while Republicans retained control over the Senate. CNBC columnists Fred Imbert and Michael Sheetz added President Trump said in a news conference the Democrats and Republicans will work together to “continue delivering for the American people, including on economic growth, infrastructure, trade” and the lowering of health care costs.

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DaVita soared at market open as Californians voted “no deal” to Proposition 8, a ballot measure that would have capped revenues dialysis providers could earn through rates from privately insured patients to 115% of the total care cost. According to CNBC columnist Berkeley Lovelace Jr., Baird senior research analyst Matthew Gillmor said DaVita could lose approximately $400 million in annual revenues if the proposition went through. The company praised the outcome of the vote in a statement and said it is strengthening its commitment to “oppose any similarly misguided policies” going forward.

See also

The Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO has not released his third-quarter portfolio as the deadline is 45 days after quarter-end. As of the second quarter, Buffett owns 38,565,570 shares of DaVita. Other gurus with holdings in the dialysis provider include Charles de Vaulx (TradesPortfolio), Francis Chou (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio).

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Disclosure: No positions.

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About the author:

James Li
I am an editorial assistant and researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website


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