DaVita Steady at Neutral - Analyst Blog
December 08 2011 - 7:45AM
Zacks
We have reiterated our Neutral recommendation on DaVita
Inc. (DVA) based on strong top-line growth in the third
quarter of 2011, which was partially offset by higher operating
expenses.
The company reported third-quarter operating earnings of $1.45
per share, exceeding the Zacks Consensus Estimate by a penny as
well as $1.15 per share earned in the comparable quarter of
2010.
DaVita has been generating strong operating cash flow, which
increased at a 4-year CAGR (2007–2010) of 13.1%.
Higher-than-expected cash flow during the first three quarters of
2011 also allowed the company to raise the 2011 operating cash flow
guidance to $1.02–1.10 billion from $900–980 million.
Additionally, DaVita has been following the strategy of growth
through acquisitions. Acquisition of dialysis centers and
businesses that own and operate dialysis centers, as well as other
ancillary services and strategic initiatives have been the
company’s preferred business strategy for years.
Pursuant to the strategy, in November 2011, the company
announced the acquisition of ExtraCorp, a German company that owns
two dialysis centers and manages two others. Further, in September
2011, DaVita completed the acquisition of rival company DSI Renal
Inc. (DSI).
Moreover, during the first nine months of 2011, DaVita acquired
and opened a total of 198 dialysis centers (including 113 centers
associated with the DSI acquisition), sold one center, closed four
centers and divested 28 centers (as a condition for the DSI
acquisition).
Additionally, the company is slowly moving into the
international market. DaVita’s strong worldwide reputation provides
competitive advantage to the company in terms of global
acquisitions.
However, a significant portion of DaVita’s dialysis and related
lab services revenues are generated from patients who have
commercial payors as the primary payor. Moreover, high
unemployment may result in shifting of people from commercial
insurance schemes to government schemes due to the wide disparity
in payment rates.
In fact, the mix of treatments reimbursed by non-government
payors, as a percentage of total treatments, has been falling
consistently over the years. The shift in payor mix will be
additionally harmful as the Medicaid rate has been reduced by many
states in 2011 and many states are considering the possibility of
reducing the rate.
Also, there is a high chance of Medicare rates being reduced by
up to 2% in 2013, which is expected to put additional pressure on
the company as almost 87% of DaVita’s patients already use Medicare
or Medicaid programs. Thus, inadequacy of government reimbursements
will substantially affect the company’s profitability.
Additionally, the company has high financial leverage and
depends upon future borrowings for growth and to
fund other liquidity needs. The financial leverage has
further increased with the $100 million increase in revolving
credit facility and $200 million by way of term
loan taken in August 2011.
Currently, the Zacks Consensus Estimate for DaVita’s
fourth-quarter earnings is $1.48 per share, up about 31% year over
year. None of the 13 firms covering the stock have revised their
estimates in the last 30 days.
For 2011, earnings are expected to be about $5.05 per share,
climbing about 15% year-over-year. The company competes with
Gentiva Health Services Inc. (GTIV) and
HealthSouth Corporation (HLS).
Currently, DaVita caries a Zacks #2 Rank, implying a short-term
Buy rating.
DAVITA INC (DVA): Free Stock Analysis Report
GENTIVA HEALTH (GTIV): Free Stock Analysis Report
HEALTHSOUTH CP (HLS): Free Stock Analysis Report
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