We have retained our Neutral recommendation on DaVita Healthcare Partners Inc. (DVA) following impressive second quarter results. This dialysis services provider currently carries a Zacks Rank #3 (Hold).
Why the Reiteration?
DaVita’s operating earnings for the second quarter of 2013 came in at $1.84 per share, lagging the Zacks Consensus Estimate of $1.86 by 11%. However, results surpassed the year-ago quarter’s earnings of $1.53 by 20.3%. Top line also improved substantially and aided the earnings improvement.
DaVita has been acquiring dialysis centers and businesses that own dialysis centers to enhance its services and expand clientele base. The company ended up acquiring 11 centers in the U.S. and 13 centers outside the U.S. in the first half of 2013. More acquisitions and alliances are expected in the future since the uncertainties related to the bundling rule and the capital markets have eased.
Moreover, DaVita’s national and global expansion initiatives since the beginning of 2013 have been remarkable. Worth mentioning in this regard are the acquisition of dialysis centers – 5 in Portugal and 4 in Poland, majority stake in Esensa S.A.S., alliance with Cureatr and Arizona Integrated Physicians. Additionally, the company’s strong operating cash flow is helping it meet its capital expenditure needs and spend on acquisitions.
On the tepid side, Davita’s debt refinancing activities elevates its debt levels significantly. Further, the company’s disengagement in share repurchases since Jul 2011 has marred investor sentiment to some extent. Although the company entered into some interest rate hedging agreements, in Mar 2013, any increase in interest obligations may further increase the company’s interest expense adversely affecting the cash flow and its ability to service its debt.
Moreover, the implementation of the healthcare reform legislations from 2014 could adversely affect DaVita’s earnings. This is because one of the provisions of the reform mandates the establishment of health insurance exchanges which might reduce the number of policyholders opting for commercial insurance. Revenues, earnings and cash flows might also be affected adversely if DaVita fails to comply with the quality measures adopted by Centre for Medicare & Medicaid Services’ proposed 2014 ESRD PPS rule that will come into effect in 2016.
Other Stocks to Consider
Other healthcare companies that are worth considering are LCA–Vision Inc. (LCAV), LHC Group Inc. (LHCG) carry a favorable Zacks Rank #1 (Strong Buy) while AmSurg Corp. (AMSG) carry a Zacks Rank #2 (Buy).