Why Berkshire Owns $2.5 Billion of DVA Stock

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dva stock Berkshire Hathaway (NYSE: BRK-B) has been betting big on the healthcare sector by investing in just one stock.

Historically, Berkshire Chairman Warren Buffett hasn't made many investments in the healthcare sector. In fact, none of Berkshire's biggest holdings include healthcare companies. But investment manager Ted Weschler, who joined Berkshire as an investment manager in 2011, loves the sector.

He's been investing heavily in a mid-cap stock called DaVita HealthCare Partners ( DVA ) . Unlike big drug companies such as Merck ( MRK ) and Pfizer ( PFE ) , DaVita isn't a household name.

But the company is a well-known provider in the niche business of kidney care. Put simply, DaVita provides dialysis treatments to patients with kidney failure. The company currently serves 168,000 patients through 2,074 centers in the U.S.

With just 73 centers outside of the U.S., international expansion remains a growth opportunity for the dialysis stock. In the last year, the company has expanded its operations to countries including Saudi Arabia, Malaysia, Colombia, Portugal and Poland.

The company's strong position in the U.S. and growth opportunity overseas has attracted Weschler to the stock.

Over the last two years, Berkshire Hathaway has bought up 37.6 million shares of DaVita HealthCare Partners. That's enough to put give Berkshire a 17.7% stake of the company, currently valued at $2.56 billion.

Berkshire's latest reported purchases of DVA stock were in late February. At the time, DVA stock traded between $67 and $69. And Berkshire reportedly bought an additional 1.13 million shares.

While Weschler is bullish on DVA stock, Berkshire doesn't plan to buy the entire company. Last May, Berkshire agreed to not increase its stake above 25%. The company also agreed to not request a seat on DaVita's board of directors.

It seems that Weschler and Buffett simply like the stock…and want to be passive shareholders for years to come. Why do they like it? This is what Weschler said in a CNBC interview earlier this month:

"The broad filters that I apply for healthcare investing in general is, No. 1: Does the healthcare company deliver better quality of care than someone could get somewhere else? And DaVita falls into that.

No. 2: Does it deliver a net savings to the healthcare system? In other words, is the total bill for U.S. healthcare cheaper because of the efficiency the company provides? DaVita  checks that box.

"And lastly: Do you get a higher return on capital, predictable growth and shareholder-friendly management? Absolutely…"

- Ted Weschler on CNBC, March 3, 2014

DVA stock has been a handsome performer. Over the last two years, the stock is up 57% versus a gain of 34% for the S&P 500.

It's the company's strong financial performance that has attracted investors, including Berkshire. Over the last three years, the company's revenues jumped 74% and net income rose 33%. That rapid growth continued in the latest quarter, with revenues up 24% and EPS rising 27%.

Shares of DaVita currently trade at around $68, or roughly the same price where Berkshire recently bought more stock. Based on 2014 EPS estimates of $3.72, the stock trades at a P/E multiple of 18.

While the stock isn't a bargain, it seems like a fair valuation for a stock with healthy growth prospects. If you're seeking exposure to the healthcare sector, DaVita HealthCare Partners is a stock to consider buying at these levels. After all, you could do much worse than following in the footsteps of Warren Buffett.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: DVA , MRK , PFE

Wyatt Investment Research

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