DVA DaVita Inc

A leading dialysis services provider in the U.S, DaVita Inc. (DVA), is slated to release its fourth-quarter 2011 financial results after the market closes on February 16, 2012.

Currently, the Zacks Consensus Estimate for fourth quarter is $1.48 per share, representing a 31% growth over the year-ago quarter.

DaVita has been generating strong operating cash flow accruing from improved earnings, robust cash collections and the timing of payments for working capital expenditures. Moreover, the company’s acquisition strategy has been accretive to earnings, while a strong cash position expands the potential for further meaningful M&A. However, the headwinds from debt refinancing and ongoing concerns related to health care reform and payor mix cast an apprehensive outlook.

Previous Quarter Performance

DaVita reported third-quarter income from continuing operations of $1.45 per share, which exceeded the Zacks Consensus Estimate by a penny. The earnings were also significantly higher than $1.15 in the prior-year quarter. Operating income for the third quarter of 2011 came in at $138.2 million, showing a substantial improvement from $119.5 million in the year-ago quarter.

Net income was $135.4 million or $1.42 per share, showing a hike from $119.4 million or $1.15 per share in the year-ago quarter.

Net operating revenues for the quarter climbed to $1.81 billion, surpassing $1.65 billion a year ago, while total operating expenses and charges climbed to $1.49 billion from $1.39 billion in the third quarter of 2010.

Agreement of Estimate Revisions

Ahead of the earnings release, we do not see any movement in the analyst estimates. Over the last 30 days, none of the 12 analysts covering the stock revised their estimates for the fourth quarter. Moreover, for the full year, none of the 13 firms covering the stock revised their estimates over the last 30 days. This implies that the analysts do not foresee any significant directional pressure on the earnings.

Magnitude of Estimate Revisions

There have been no estimate revisions over the last 90 days. As a result, earnings per share guidance remained at $1.48 for the fourth quarter of 2011 and $5.05 for full-year 2011.

Earnings Surprise

Going by past trends, we are slightly optimistic about DaVita exceeding estimates. The company exceeded estimates in three of the preceding four quarters. The average earnings surprise was a positive 0.97%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Conclusion

Acquisition of dialysis centers and businesses that own and operate dialysis centers has been DaVita’s preferred business strategy since years, generating substantial inorganic growth. Since September 2011, the company completed the acquisition of DSI Renal Inc. and announced the acquisition of ModernMed and ExtraCorp AG. Moreover, the company is slowly but steadily moving into the international markets. In January 2012, the company announced the purchase of a majority stake in NephroLife, an India-based kidney care company.

Additionally, DaVita has been generating strong operating cash flow over the years. Higher-than-expected cash flow during the first three quarters allowed the company to raise the 2011 operating cash flow guidance to $1.02–1.10 billion from the previous guidance of $900–980 million.

Moreover, the long-term Epogen purchase deal with Amgen Inc. (AMGN) is expected to reduce the company’s expenditure on the drug by a substantial amount. However, DaVita’s debt refinancing continues to keep the company’s financial leverage at elevated levels, thereby limiting its ability to refinance the debt or seek additional financing at acceptable terms.

Additionally, the mix of treatments reimbursed by non-government payors, as a percentage of total treatments, has been falling consistently over the years. The trend is negatively impacting DaVita as the company generates a sizeable portion of its revenues from dialysis and related lab services from patients who have commercial payors as the primary payor.

The shares of DaVita currently carry a Zacks #2 Rank, implying a short-term ‘Buy’ rating. We are also maintaining a long-term ‘Outperform’ recommendation on the shares.

 
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