On Jan 16, we issued an updated research report on DaVita HealthCare Partners Inc. (DVA).
DaVita’s preferred business strategy over the last several years has been the acquisition of dialysis centers and businesses that own and operate dialysis centers as well as other ancillary services. The company acquired 16 dialysis centers in the U.S. and 4 dialysis centers outside the U.S. along with other medical businesses in the first nine months of 2014.
Moreover, this strategy has led to DaVita’s international expansion thereby strengthening its position in the emerging and developing markets, such as, Columbia, Portugal, Malaysia, Taiwan, Saudi Arabia, China, India and Germany
Additionally, generation of strong operating cash flow from improved earnings, robust cash collections and the timing of payments for working capital expenditures support its capital expenditure needs as well as growth initiatives.
Dialysis and related lab services account for 33% of the company’s revenues where payments received from commercial payors are the primary generators of profit. A rise in unemployment may result in people shifting from commercial insurance schemes to government schemes due to a wide disparity in payment rates.
The company’s debt refinancing continues to keep its financial leverage at high levels. The company depends on future borrowings to service its indebtedness and fund other liquidity needs. The company’s expenses are significantly high and rising levels of interest expenses are likely to aggravate it. If additional debt refinancing is unavailable on acceptable terms, the company may face difficulties in expanding the business, taking advantage of business opportunities, responding to competitive pressure or refinancing maturing debt.
Moreover, the health care reform legislation could adversely affect DaVita’s earnings. While some provisions of the legislation came into effect in 2010 and 2011, many are yet to be implemented. Moreover, the company’s revenues, earnings and cash flows are likely to decline due to the government’s budget for fiscal 2014, which increased the coding intensity adjustments, effective Jan 2015. Revenues will also be adversely affected by the government’s proposed cut in Medicare reimbursements in 2015.
Currently, DaVita carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Better-ranked stocks in the medical outpatient homecare sector include HEALTHSOUTH Corp. (HLS), American Campus Communities, Inc. (ACC) and Amedisys Inc. (AMED). While HEALTHSOUTH sports a Zacks Rank #1 (Strong Buy), American Campus Communities and Amedisys hold a Zacks Rank #2 (Buy).
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