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Why DaVita Is a Sell

On Jul 1, 2014, Zacks Investment Research downgraded DaVita Healthcare Partners Inc. (DVA) to a Zacks Rank #4 (Sell).

Why the Downgrade?

DaVita has witnessed sharp downward estimate revisions, since it lowered its operating income guidance and reported dismal first quarter results. Notably, this kidney care stock delivered negative earnings surprises in two out of the last four quarters with an average miss of 0.07%.

Moreover, DaVita has been overburdened with debts. Although its debts at the end of the first quarter represented slight decline from that at year-end 2013, a couple of announcements in the last month raise caution as these can push up debt levels further. On Jun 2, 2014, DaVita announced that it will enter into senior secured credit facilities worth $5.5 billion to refinance its existing credit facilities and repay existing debt.

Additionally, on Jun 10, the company issued $1.75 billion worth of debt to repay earlier debt. Although these debt issuances are aimed at reducing earlier debt, they tend to immediately increase interest expenses.

Another factor that caused the bearish sentiment on the stock was DaVita’s lowered guidance for 2014. The company revised its operating income guidance for the HCP business, inducing to lower the upper end operating income outlook. The revised guidance now stands at $1.725 billion - $1.840 billion from $1.725 -$1.860 billion guided earlier.

Earlier, DaVita reported first-quarter earnings per share of 85 cents that lagged the Zacks Consensus Estimate by 2.30%. Results also declined year over year on disappointing performance by the HealthCare Partners (HCP) segment.

The Zacks Consensus Estimate for 2014 decreased 4.5% to $3.59 per share over the last 60 days. For 2015, most of the estimates were revised downward over the same period, sinking the Zacks Consensus Estimate by 3.2% to $3.89 per share.

Other Stocks to Consider

Better-ranked players in the healthcare services space that look attractive at current levels include Almost Family Inc. (AFAM), Amedisys Inc. (AMED) and PharMerica Corp. (PMC). All these stocks have a Zacks Rank #2 (Buy).

Read the Full Research Report on DVA
Read the Full Research Report on AFAM


Zacks Investment Research

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