The new investment managers of Berkshire Hathaway (
and Todd Combs, have generated great performance numbers since
they join Berkshire. One of the reasons is that they bought into
dialysis service provider DaVita. The stock of DaVita has had a
tremendous run over the past four years. It gained 53% alone over
the past 12 months.
If you wonder why Berkshire Managers like DaVita, please read
Geoff Gannon's article
Why Ted Weschler Keeps Buying DaVita (
started buying DaVita in 2011. Berkshire now owns almost 14
million shares, or 14.2% of the company. The last purchase by
Berkshire Hathaway was on March 4, 2013, as reported in
GuruFocus Real Time Picks
While the stock has had great run, it may have gone ahead of
itself, as suggested by DaVita's Peter Lynch chart below:
Peter Lynch said in his book One Up on Wall Street,
"A quick way to tell if a stock is overpriced is to compare
the price line to the earnings line. If you bought familiar
growth companies - such as Shoney's, The Limited, or Marriott -
when the stock price fell well below the earnings line, and sold
them when the stock price rose dramatically above it, the changes
are you'd do pretty well."
Just as pointed out by Peter Lynch and shown in the chart above,
the stock prices of DaVita closely follow the Earnings line in
Peter Lynch Chart. When the price was above the Earnings line, it
always tended to deliver poor returns. When the price was below
the Earnings line, it tended to perform better in the following
years. As of today, the price is above the Earnings line by
almost 100%. We do not expect good returns from DaVita in the
By the way, you can learn how to create a Peter Lynch Chart in
two clicks here.
GuruFocus DCF Calculator and Reverse DCF Calculator further
proves that the stock is overvalued. At 13.3% earnings growth
rate for the 10 years and 12% discount rate, the fair value of
the stock is $77.4, suggesting the stock is 61% overvalued. A
lower 10% discount rate suggests the stock is 35% overvalued.
Again at 10% discount rate, Reverse DCF suggests that the company
needs to grow its earnings 17.72% for the next 10 years.
How realistic is it for DaVita to grow its earnings at 17.72% for
the next 10 years? Let's look at its past growth. In the past
five years, the company grew its revenue and net income at about
9% a year. See the chart below:
The company has been buying back shares at about 2% a year.
Therefore its earnings per share has been growing at about 11% a
year. The market expectation of 17.7% a year as derived from
Reverse DCF Calculator seems out of reach.
Check out DaVita 10-year financial data and charts.
Disclosure: The author does not own shares of DVA.About
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