DaVita Remains Neutral (DVA) (SSRX)

Zacks

DaVita Inc. (DVA) boasts a strong top-line growth, strong cash flows, sturdy balance sheet and rapid domestic and international expansion. However, increasing expenses, unfavorable shift in payor mix, headwinds from debt refinancing and ongoing concerns related tothe health care reform are the downsides. Thus, we retain our Neutral recommendation on the company.

DaVita reported first-quarter 2012 operating earnings of $1.46 per share, beating the Zacks Consensus Estimate by a penny. Earnings per share were also substantially higher than the prior-year quarter earnings of 96 cents.

Acquisition of dialysis centers and businesses that own and operate dialysis centers, as well as other ancillary services and strategic alliances have been DaVita’s preferred business strategy since years.

The agreement to purchase HealthCare Partners, signed in May 2012, will support and augment the company’s primary care and specialty physician services as well as hospital and other healthcare services. During the first quarter of 2012, DaVita acquired 28 centers and opened 13 centers in the U.S., while 4 centers were opened outside the U.S.

DaVita is rapidly expanding its international presence as well. In April 2012, the company acquired a controlling interest in Lehbi Care, a Saudi Arabian kidney care company. This was a significant step forward in DaVita’s international expansion strategy, as Saudi Arabia has substantial demand for dialysis services and offers strong growth opportunities going ahead.

DaVita also announced a joint venture with 3SBio Inc. (SSRX), a China-based biotechnology company, in March 2012, to jointly invest about $20 million in China. The agreement will be beneficial for DaVita as the Chinese market will provide it ample scope for growth. The company will also gain from 3SBio’s widespread marketing network in China.

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 fiscal 2011 and the first quarter of 2012.

However, the rising unemployment may result in shifting people from commercial insurance schemes to government schemes due to wide disparity in payment rates.

Moreover, DaVita has been embroiled in various lawsuits and investigations, which can be detrimental to its shareholders’ confidence. In July 2012, the company agreed to pay $55 million to settle a lawsuit accusing it of overusing Epogen, an Anemia drug used for increasing the red blood cell count in kidney patients. Apart from the settlement amount, the company will also have to pay attorney fees, both of which will substantially increase the company’s expenses.

DaVita currently carries a Zacks #3 Rank, implying a short-term Hold rating.

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