We have upgraded our recommendation on
) to Outperform from Neutral based on the company's strong cash
flows and strategic acquisitions. The bundled ESRD payment system
is also expected to be a long-term positive.
DaVita reported third-quarter 2011 operating earnings of $138.2
million or $1.45 per share, exceeding the Zacks Consensus Estimate
by a penny. Results were also higher than the $119.5 million or
$1.15 per share earned in the comparable quarter of 2010.
DaVita has been generating strong operating cash flow accruing
from improved earnings and robust cash collections, leading to 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 its 2011 operating cash flow guidance to $1.02-1.10 billion
from $900-980 million. The company projects similar growth in the
future and believes that it will be able to meet its capital
expenditures, as well as repurchase shares and spend on
In addition to improving its operating performance, DaVita
constantly seeks to generate cost efficiencies. The recent
long-term Epogen purchase deal with
) is expected to significantly reduce the company's expenditure on
Epogen, a medicine used for increasing red blood cells in kidney
Moreover, DaVita is regularly expanding via acquisitions. In
January 2012, the company's subsidiary - Paladina Health LLC -
announced the acquisition of ModernMed, which operates clinics and
physician practices in 12 states across the U.S.
However, DaVita is facing multiple investigations for
over-billing of Medicare and over-use of Epogen. If the charges are
found to be true, the company will not only suffer substantial
reduction in goodwill, but will also face several lawsuits and
might be heavily fined, weighing on the financials.
Moreover, a significant portion of DaVita's dialysis and related
lab services revenues are generated from patients who have
commercial payors as the primary payor. However, unemployment may
result in the shifting of people from commercial insurance schemes
to more affordable government schemes.
Moreover, the shift will be harmful as the Medicaid was reduced
by many states in 2011 and many others are considering the
possibility of reducing the rate. Furthermore, almost 87% of
DaVita's patients already use Medicare or Medicaid programs,
thereby leading to additional pressure on the company, as
inadequacy of government reimbursements will substantially affect
The Zacks Consensus Estimate for DaVita's fourth-quarter
earnings is currently $1.48 per share, up about 31% year over year.
None of the 12 firms covering the stock 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.
DaVita currently caries a Zacks #1 Rank, implying a short-term
'Strong Buy' rating.
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