Kidney disease is a big problem in the U.S. Over 37 million people have some form of kidney ailment. Approximately 800,000 are living with kidney failure and over 560,000 use some type of dialysis treatment.
The country’s largest kidney dialysis treatment provider is DaVita Inc. (DVA, Financial). As of June 30, the company provided dialysis services to 248,000 patients at 3,056 outpatient dialysis centers, of which 2,703 centers were located in the U.S. and 353 centers were located in 11 international countries.
The company provides kidney dialysis services for patients suffering from chronic kidney failure. It operates kidney dialysis centers and provides related lab services in outpatient dialysis centers. It also offers outpatient, hospital inpatient and home-based hemodialysis services. In addition, DaVita offers integrated care and disease management services to patients in risk-based and other integrated care arrangements, clinical research programs, physician services and other comprehensive kidney care services.
Incorporated in 1994, the company is headquartered in Denver. The current market capitalization if $9.2 billion.
Kidney disease
There are five stages of chronic kidney disease, or CKD. These stages are generally based on how well the kidneys work to filter waste and extra fluid out of the blood, with higher stages of CKD corresponding to progressing levels of kidney disease.
Stage 1 CKD is the closest to healthy kidney function. A Stage 5 classification indicates that a patient has severe kidney damage. A patient diagnosed with Stage 5 CKD has kidneys that have lost nearly all functionality or have failed.
If the patient's kidneys fail, they are then diagnosed with end-stage renal disease, also known as end-stage kidney disease. Because loss of kidney function is normally irreversible, these patients require continued dialysis treatments or a kidney transplant to sustain life. Dialysis is the removal of toxins, fluids and salt from the blood of patients by artificial means.
Patients suffering from ESKD generally require regular life-sustaining dialysis therapy for the rest of their lives or until they receive a kidney transplant. Because kidney failure is typically caused by type I and type II diabetes, hypertension, polycystic kidney disease, long-term autoimmune attack on the kidneys and prolonged urinary tract obstruction, slowing the progression generally involves working with nephrologists or dieticians to help control blood pressure, monitor blood glucose and maintain healthy diet and exercise routines, among other things.
Financial review
The company reported second-quarter results on Aug. 3, which showed strong traction on strategic initiatives. Total U.S. dialysis treatments for the quarter were 7,231,242, or an average of 92,708 treatments per day, which was an increase of 0.3% compared to the first quarter.
The quarter was negatively impacted by a seasonal decrease in hospital inpatient revenues. The year-to-date change was primarily driven by a net increase in the Medicare rate due to a base rate increase in 2023, which was partially offset by the phased increase of sequestration of 1% in April 2022 and full 2% beginning July 1, 2022. The increase was also impacted by the continued shift to Medicare Advantage plans and overall favorable mix improvements as well as increases in hospital inpatient dialysis revenues.
Revenue increased 2.5% to $3 billion compared to the prior-year period and adjusted operating income was $432 million. Adjusted operating income improved on a sequential basis from $352 million in the first quarter of 2023. Operating cash flow was $450 million and free cash flow was $260 million for the second quarter.
On the balance sheet, cash and short-term investments totaled $340 billion and long-term investments were $639 million. Total debt was $8.7 billion.
In a statement, CEO Javier Rodriguez said, "Over the first half of the year, DaVita has been focused on innovation in our clinical systems and driving operational improvements throughout our organization. Our second quarter performance reflects strong traction across those initiatives, putting us on a path to deliver strong clinical outcomes and financial results for the year."
Valuation
Consensus earnings per share estimates for 2023 are $7.24 and $8.04 for 2024. That puts the stock trading at 13.5 times 2023 estimated earnings. The current enterprise value/Ebitda ratio is 9.5, which is below the sector average of 13.5.
The GuruFocus discounted cash flow calculator creates a value of $110 when using $7.24 as the starting point and an 8% 10-year growth rate.
There are three Wall Street analysts with recent reports with an average price target of $123, including a high target of $142 and a low target of $112.
The company does not currently pay a dividend, but is an active repurchaser of its own shares. Share buybacks have totaled $3.8 billion over the past three fiscal years.
Guru trades
Gurus who have purchased DaVita stock recently include Ray Dalio (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio). Investors who have reduced or sold out of their positions include Steven Cohen (Trades, Portfolio) and Larry Robbins (Trades, Portfolio).
Summary
DaVita provides a critical health care need as kidney disease affects a large portion of the U.S. population. Two-thirds of company revenues are provided by Medicare or other government providers, which creates some pricing risks.
The stock is trading in the middle of its 52-week range, but there appears to be upside ahead and represents a potentially solid long-term investment opportunity for patient investors.
