We have upgraded our recommendation on
DaVita HealthCare Partners Inc.
) to Outperform from Neutral based on the expected growth in its
future cash flows and the recent merger with HealthCare Partners.
The company's sturdy balance sheet provides opportunities for
meaningful mergers and acquisitions. Consequently, DaVita is
rapidly expanding its international presence and actively
acquiring domestic companies.
DaVita reported third-quarter 2012 operating earnings of $1.50
per share, lagging the Zacks Consensus Estimate of $1.55.
Nevertheless, operating earnings were substantially higher than
$1.45 per share reported in the prior-year 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. Substantial growth is
expected in future as well, as reflected by the operating cash
flow guidance of $0.95-$1.05 billion for 2012 and $1.35-$1.50
billion for 2013.
The strong cash flows allow DaVita to fund its capital
expenditure, repurchase shares and spend on acquisitions. During
the first nine months of 2012, the company acquired 71 dialysis
centers, opened 48 centers and merged or sold 8 centers in the
U.S., while 10 centers were acquired or opened outside the
Additionally, DaVita acquired and merged with HealthCare
Partners in November 2012. The company also acquired ModernMed,
purchased a controlling interest in a Saudi Arabian kidney care
company - Lehbi Care - and increased its stake in NephroLife, an
India-based kidney care company, so far in 2012.
Further, the company announced a joint venture with
), a China-based biotechnology company, in March 2012, which is
expected to be beneficial for DaVita as the Chinese market
provides ample scope for growth.
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. Almost 34% of the
company's revenues from dialysis and related lab services came
from such patients in 2011 and the first nine months of 2012.
High unemployment and wide disparity in payment rates is
resulting in the shifting of people from commercial insurance
schemes to government schemes. Consequently, the mix of
treatments reimbursed by non-government payors, as a percentage
of total treatments, has been falling consistently over the
Moreover, DaVita's debt refinancing continues to keep
financial leverage at elevated levels. The company issued senior
notes in August 2012 to finance the acquisition of HealthCare
Partners, apart from using its free cash balance and senior
secured credit facility.
This is expected to increase DaVita's interest by $57.5
million annually, which will weigh on its already high expenses.
The issuance will also increase the company's total debt, thereby
deteriorating its financial leverage.
Nevertheless, the positive factors outweigh the negatives,
raising our expectations for growth in the upcoming quarters.
DaVita currently carries a Zacks #3 Rank (short-term Hold).
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