A leading dialysis services provider in the U.S,
), 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
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
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.
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
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
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
) 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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