DaVita Inc (DVA, Financial), a leading provider of dialysis services in the United States, reported a daily gain of 7.31% and an Earnings Per Share (EPS) (EPS) of $5.42 as of August 04, 2023. But does this recent performance indicate that the stock is modestly undervalued? Let's delve into a detailed valuation analysis to answer this question.
A Brief Overview of DaVita Inc (DVA, Financial)
DaVita (DVA) operates over 3,100 facilities worldwide, predominantly in the U.S., treating more than 240,000 patients annually. The company holds a substantial market share of over 35% in the U.S. dialysis services sector. DaVita's revenue primarily comes from government payers, accounting for approximately 69% of U.S. sales, with the remaining 31% contributed by commercial insurers. Interestingly, these commercial insurers, representing only about 10% of the U.S. patients treated, generate nearly all of the profits for DaVita's U.S. dialysis business.
With a current stock price of $108.99 per share and a market cap of $9.9 billion, an examination of DaVita's fair value (GF Value) is crucial to understanding whether the stock is undervalued, overvalued, or fairly valued.
Understanding the GF Value of DaVita (DVA, Financial)
The GF Value is a proprietary measure that provides an estimate of a stock's intrinsic value. It is calculated based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the stock's ideal fair trading value.
According to GuruFocus Value calculation, DaVita stock is estimated to be modestly undervalued. This implies that the long-term return of its stock is likely to be higher than its business growth. The GF Value Line, indicating the fair value at which the stock should be traded, suggests that if the stock price is significantly above this line, it is overvalued, and its future return is likely to be poor. Conversely, if the stock price is significantly below the GF Value Line, its future return will likely be higher.
Evaluating DaVita's Financial Strength
Investing in companies with low financial strength can lead to permanent capital loss. Therefore, it's crucial to evaluate a company's financial health before deciding to buy shares. DaVita's cash-to-debt ratio stands at 0.03, ranking lower than 93.22% of companies in the Healthcare Providers & Services industry. This suggests a poor balance sheet, and GuruFocus ranks DaVita's financial strength as 3 out of 10.
Assessing Profitability and Growth
Investing in profitable companies typically carries less risk. DaVita has been profitable for 10 years over the past decade. In the past 12 months, the company reported revenues of $11.7 billion and an Earnings Per Share (EPS) of $5.42. Its operating margin of 11.03% is better than 75.35% of companies in the Healthcare Providers & Services industry, indicating strong profitability .
Growth is a crucial factor in a company's valuation. DaVita's 3-year average revenue growth rate is better than 71.23% of companies in the Healthcare Providers & Services industry. Its 3-year average EBITDA growth rate is 13.5%, ranking better than 56.41% of companies in the same industry, indicating promising growth .
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) to the Weighted Average Cost of Capital (WACC) can provide insights into its profitability. If the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For DaVita, the ROIC for the past 12 months is 6.38, and its cost of capital is 5.24, suggesting a positive value creation.
Conclusion
Overall, DaVita Inc (DVA, Financial) stock appears to be modestly undervalued. Despite its poor financial condition, the company exhibits strong profitability and growth, ranking better than 56.41% of companies in the Healthcare Providers & Services industry. To gain more insights into DaVita stock, you can check out its 30-Year Financials here.
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