On Mar 4, we issued an updated research report on DaVita HealthCare Partners Inc. DVA.
DaVita Healthcare’s fourth-quarter earnings surpassed the Zacks Consensus Estimate but declined year over year. Although top line improved, the rise in expenses being more than that of revenues led to margin contraction.
DaVita’s business strategy has been to acquire dialysis centers and businesses that own and operate dialysis centers as well as other ancillary services. In 2014, DaVita acquired 18 dialysis centers, sold one center, merged 16 centers and closed one center in the U.S. Outside the U.S., the company acquired 7 dialysis centers and other medical businesses, opened 11 new dialysis and hospital-operated centers and closed 2 dialysis centers.
DaVita has been steadily expanding in the international markets. Over the past few years, the company strengthened its position in the emerging and developing markets like Columbia, Portugal, Malaysia, Taiwan, Saudi Arabia, China, India and Germany, through strategic alliances as well as acquisition of dialysis centers. In Dec 2014 the company merged two of its business units – DaVita Clinical Research and HealthCare Partners Clinical Research – to expand its extensive clinical research and data analytics services.
The company has been generating strong operating cash flow stemming from improved earnings, robust cash collections and the timing of payments for working capital expenditures. The strong cash flow not only enables the company to meet its capital expenditure needs but also spend on acquisitions.
The commercial payors are the primary generators of profit for the company. However, a rise in unemployment may result in people shifting from commercial insurance schemes to the government ones due to wide disparity in payment rates. This may adversely affect the company’s revenues.
The company’s debt refinancing continues to keep DaVita’s financial leverage at high levels. The company depends upon future borrowings to service its indebtedness and fund other liquidity needs. Moreover, the issuance of senior notes and term loans in Jun 2014 is likely to increase interest expenses further.
The company’s expenses are significantly high and rising levels of interest expenses are likely to aggravate it. This may adversely affect the earnings and cash flow and the ability to service its debt.
The impact of the health care reform legislation could also have an adverse effect on DaVita’s earnings. The exchanges are reducing the number of policyholders opting for commercial insurance. Thus, the establishment of the exchanges can have an unfavorable effect on the company’s earnings and cash flow.
Currently, DaVita carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Better-ranked stocks in the same sector include Almost Family Inc. AFAM, Chemed Corp. CHE and LHC Group, Inc. LHCG. All of these stocks sport a Zacks Rank #1 (Strong Buy).
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