On Jul 16, 2014, we issued an updated research report on DaVita Healthcare Partners, Inc. (DVA). The company boasts rapid expansion internationally as well as active domestic acquisitions, driven by strong cash flow and financial position.
These factors will also allow the company to engage in inorganic growth opportunities going forward. However, high financial leverage and increase in Medicare Advantage beneficiaries, along with the adverse effects of healthcare reform pose threats.
Acquiring dialysis centers and businesses that own and operate dialysis centers as well as other ancillary services and strategic initiatives have been DaVita’s preferred business strategy over the past several years. In the last reported quarter, DaVita acquired dialysis, medical and other businesses in the U.S., thereby increasing its membership count. Additionally, implementation of the molecular diagnostic testing by using utilized technology from Roche Diagnostics is expected to help the company upgrade its services.
The raised operating income guidance for the dialysis services and related ancillary businesses (to $1.520–$1.580 billion from $1.475–$1.550 billion) further raises optimism.
DaVita is steadily expanding in the international markets. In the past couple of years, the company strengthened its position in the emerging and developing markets of Columbia, Portugal, Malaysia, Taiwan, Saudi Arabia, China, India and Germany, among others, through strategic alliances as well as acquisition and dialysis centers.
Moreover, DaVita has been generating strong operating cash flow stemming from improved earnings, robust cash collections and the timing of payments for working capital expenditures. The strong cash flow enables the company to meet its capital expenditure needs and spend on acquisitions.
On the flip side, DaVita’s high financial leverage is alarming. The company’s debt refinancing continues to keep DaVita’s financial leverage at high levels. Alongside, high interest expenses are likely to aggravate the problem of mounting expenses.
Moreover, a significant percentage of DaVita’s patients already use Medicare or Medicaid programs. With the overall increase in Medicare Advantage beneficiaries in the U.S., this percentage is likely to increase further, leading to additional pressure on the company’s profitability, as inadequacy of government reimbursements could force it to close a number of centers.
Further, beginning 2014, CMS’ payments to Medicare Advantage plans are likely to decrease as this government entity will have to increase coding intensity adjustments for MA plans. Subsequently, payment to DaVita is expected to reduce.
Earlier, the company reported first-quarter earnings that missed the Zacks Consensus Estimate by 2.3%. However, this Zacks Rank #3 (Hold) stock delivered positive earnings surprises in the last three quarters with an average beat of 0.3%.
Other Stocks to Consider
Better-ranked stocks in the sector include Amedisys Inc. (AMED), Gentiva Health Services Inc. (GTIV) and AmSurg Corp. (AMSG). All these stocks carry a Zacks Rank #2 (Buy).