It is widely known that
has made a fortune buying quality companies at discounts to their
intrinsic value and holding for long periods of time. But this
week, his company Berkshire Hathaway (
boosted its stake in kidney dialysis company
) to over 10%, as the company climbed to its all-time peak stock
price. The buy was not an anomaly for Buffett, but representative
of several instances in his investing history in which company
quality trumped price for the investor who has said, "It's far
better to buy a wonderful company at a fair price than a fair
company at a wonderful price." While Buffett has clearly
succeeded overall with his strategies, in at least one instance
in his past, buying a good company at a high price has proved
Few value investors would consider DaVita a cheap stock. It has a
P/E of 18.99, P/B of 3.9, its highest level in more than a year,
and its stock price has escalated almost 65% in the last five
years. Buffett, or one of his new portfolio managers
or Todd Combs, first bought shares at an average of $71 in the
fourth quarter of 2011, and paid an average of $84 and $86 for
additional shares in the next two quarters, respectively. The
stock is up 29% from his average purchase price per share.
On Sept. 28, Berkshire added 282,403 more DaVita shares at
$103.83 per share, a record high share price, pushing it above
the 10% ownership threshold.
But DaVita meets several of Buffett's criteria signifying a
- Proven and predictable revenue and earnings growth
- Sustainable price power and gross margin (moat)
- Capable management
DaVita has achieved an annual EBITDA per share growth rate of
17.8% over the last ten years, and 18.6% revenue per share growth
in the same period. Its gross margin has risen from 30.7% in 2008
to 33% in 2011, and has remained near its level a decade ago,
DaVita is the second-largest kidney dialysis company in the U.S.,
behind Fresenius Medical Care AG & Co. (
), and has approximately one-third of the dialysis market share.
DaVita operates 1,884 outpatient dialysis centers in the U.S.,
serving approximately 149,000 patients as of June 30, 2012,
according to its website.
Fresenius, by contrast, operates 3,124 dialysis clinics globally
and treats 256,456 patients worldwide. DaVita has room to grow to
catch up with it internationally. Fresenius treats 164,058
patients in the U.S., close to DaVita's domestic number, with
1,077 international clinics. At an earlier stage in its
international expansion, DaVita treats approximately 1,000
patients outside the U.S. at 19 dialysis centers.
Fresenius has 13.1% EBITDA per share growth and 12.1% revenue per
share growth annually on average for the last 10 years. It has a
slightly higher margin, 35.3%, expanded from 30.4% a decade ago,
and a P/E ratio of 20.2 and P/B ratio of 2.5. Its share price is
also close to a 10-year high.
DaVita also offers high-quality care. In an annual patient
satisfaction survey, 96% of respondents said they would recommend
DaVita for dialysis services, and its clinical outcomes are the
best or among the best in virtually every category, with 10
consecutive years of improvement, according to its web site,
evidencing capable management.
Buffett's biggest mistake with buying high occurred in early
2008, when he doubled down on ConocoPhillips (
) in 2008, at historical high prices, just before its
approximately 50% freefall in the remainder of the year. The
stock has still not reached Buffett's buy prices that year, and
he sustained billions in losses.
Despite fitting Buffett's idea of a high-quality company in some
ways - strong net income and revenue growth and a 28.4% gross
margin - ConocoPhillips suffered the effects of a record spike
and then collapse of crude prices in 2008.
Buffett explained to investors in his 2009 annual letter:
I told you in an earlier part of this report that last year I
made a major mistake of commission (and maybe more; this one
sticks out). Without urging from Charlie or anyone else, I bought
a large amount of ConocoPhillips stock when oil and gas prices
were near their peak. I in no way anticipated the dramatic fall
in energy prices that occurred in the last half of the year. I
still believe the odds are good that oil sells far higher in the
future than the current $40-$50 price. But so far I have been
dead wrong. Even if prices should rise, moreover, the terrible
timing of my purchase has cost Berkshire several billion
Buffett bought at peak prices in two other prominent instances.
First, he initiated an IBM (
) stake in the first quarter of 2011 at an average price of $159
a share, an all-time-high quarter, and continued to build the
position as the price steadily increased to even greater heights
in 2012, making it his third largest position. As of the end of
the second quarter, he owns 5.83% of IBM's shares outstanding, at
a cost of approximately $10.7 billion.
When asked about his purchase at all-time highs on CNBC, Buffett
lauded the company's economic moat, shareholder reverence,
management, record of strategy execution and vision for the
future, calling it "a wonderful company."
He also acknowledged buying railroad Burlington Northern Santa Fe
LLC (BNSF), Berkshire's largest-ever acquisition, at all-time
highs in 2009 and 2010.
"Berkshire's $34 billion investment in BNSF is a huge bet on that
company, CEO Matt Rose and his team, and the railroad industry,"
Buffett said in a statement. "Most important of all, however,
it's an all-in wager on the economic future of the United States.
I love these bets."
The large DaVita holding increase may be Buffett allowing his
portfolio managers Weschler and Combs to invest greater amounts
of Berkshire's float. Because Buffett famously makes mostly
massive investments that will move the needle at Berkshire,
smaller purchases made in the last several quarters, such as
DaVita, were likely made by the new managers.
held a long-term position in DaVita at his management firm,
Peninsula Capita, before joining Berkshire in 2011, roughly the
same time Berkshire began buying shares. If the new DaVita
purchase comes from Weschler, it raises the question of whether
Weschler will be more concerned with price or business quality
after Buffett retires and he and his two associates alone run the
Since Berkshire disclosed its 10% ownership of DaVita, the price
has increased almost 4%.
See Warren Buffett's portfolio here. Also check out the
Undervalued Stocks, Top Growth Companies and High Yield stocks of
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