DaVita's Acquisitions Look Promising, High Debt A Concern
On Sep 30, we issued an updated research report on DaVita HealthCare Partners Inc. (DVA - Analyst Report). We believe that the company’s strength lies in its acquisitions and global foothold. However, its high debt levels and the adverse effect of healthcare reforms are concerns.
Earlier, the company reported second-quarter 2014 results that surpassed the Zacks Consensus Estimate and improved year over year as well. The upside was driven by improvement in the Kidney Care segment, strong clinical outcomes and Medicare Advantage revenues.
The acquisition of dialysis centers and businesses that own and operate dialysis centers as well as other ancillary services, along with its strategic initiatives have constituted DaVita’s business strategy over the past several years. In the first half of 2014, DaVita took over 1 dialysis center in the U.S., 3 dialysis centers outside the U.S. and other medical businesses. The raised operating income guidance for the dialysis services and related ancillary businesses further drives optimism.
DaVita is steadily expanding in the international market. In the past couple of years, the company strengthened its position in emerging economies such as Columbia, Portugal, Malaysia, Taiwan, Saudi Arabia, China, India and Germany through strategic alliances as well as acquisition of dialysis centers. This will expectedly help it deliver more efficient patient care and hence, induce growth.
DaVita 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 enables the company to meet its capital expenditure needs and spend on acquisitions.
On the flip side, 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 33% of the company’s revenues from dialysis and related lab services came from such patients in the first half of 2014. However, rising unemployment could cause people to shift from commercial insurance schemes to government schemes due to wide disparity in payment rates. In fact, the mix of treatments reimbursed by non-government payors, as a percentage of total treatments, has been falling consistently over the years. Moreover, owing to the new screening procedures designed by the Centers for Medicare and Medicaid Services (CMS), the Medicare contractor approval was delayed, thereby causing a delay in reimbursement. This could dent revenues.
Moreover, DaVita’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. Although debt expense remained almost flat in the first half of 2014, the continued issuance of debt is expected to increase borrowing costs going forward.
The impact of the healthcare reform legislation could adversely affect DaVita’s earnings. Beginning 2014, CMS’ payments to Medicare Advantage (MA) plans are likely to decrease as this government entity will have to increase coding intensity adjustments for MA plans. Subsequently, payment to DaVita is expected to reduce. Moreover, the company’s revenues, earnings and cash flows are likely to decline due to the government’s budget for fiscal 2014 that increased the coding intensity adjustments effective Jan 2015. Revenues will also likely be adversely affected by the government’s proposed cut in Medicare reimbursements in 2015.
Stocks in the healthcare services space that look attractive at current levels include Almost Family Inc. (AFAM - Snapshot Report), Gentiva Health Services Inc. (GTIV - Analyst Report) and LHC Group, Inc. (LHCG - Snapshot Report).
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Disclosure: None.
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