Via SeekingAlpha.com

DaVita (DVA) is the second-largest U.S. dialysis provider, and a long-term holding in the Berkshire Hathaway (BRK.A) (BRK.B) equity portfolio. It is of interest to prospective investors now by virtue of its profitability, its growth prospects, and its current valuation.

Founded in 1994, Davita, Inc. is a provider of kidney dialysis services for patients suffering from chronic kidney failure and from end stage renal disease. In the United States, only German firm Fresenius Medical Care (FMS) serves more patients, and no other competitor comes close.

Dialysis Provider Number of U.S. patients in 2019
Fresenius Medical Care 208,007
DaVita, Inc. 204,000
U.S. Renal Care 25,327
American Renal Associates 17,018
Dialysis Clinic, Inc. 14,969
Satellite Healthcare 8,209
Atlantic Dialysis Management 2,309
Northwest Kidney Centers 1,822
Rogosin Institute 1,675
Centers for Dialysis Care 1,526

Figures collated from Statista.

Outside the U.S., Davita – which is Italian for “giving life” – operates in ten other countries: Brazil; China; Colombia; Germany; Malaysia; Poland; Portugal; Saudi Arabia; Singapore; and Taiwan. It also has corporate and management offices in the Netherlands and in the United Kingdom to provide strategic support. The steady profitability of this international dialysis provider is clear from its 15.42% operating margin and from its reported free cash flow of $1.31 billion, in addition to the revenue and net income figures it has reported over the past five years.

Year Revenue ($) Net Income ($)
2015 13.78 billion 269.73 million
2016 10.71 billion 1.03 billion
2017 10.88 billion 901.28 million
2018 11.4 billion 624.32 million
2019 11.39 billion 706.83 million
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Figures collated from annual reports available from DaVita’s investor relations page.

Shareholders have also benefited from DaVita’s profitability, as is evident from the 27.79% return on equity. Small wonder that Berkshire Hathaway has seen no need to divest itself of this stock. The 38,565,570 shares that Berkshire holds were purchased not by Warren Buffett himself, but one of his two portfolio managers, Ted Weschler.

DaVita had been a holding in Weschler’s Peninsula Capital Advisors’ fund which he ran prior to joining Berkshire, and was his third-largest holding – comprising 17.6% of his portfolio. While DaVita is not as prominent within the Berkshire portfolio, the Oracle of Omaha’s conglomerate is by far DaVita’s largest institutional investor, holding a 24.06% stake. The quality of DaVita’s operations is clear to Berkshire and to Fortune Magazine, which have kept DaVita on its list of the world’s most admired companies for twelve years.

DaVita has been on Fortune’s list of the world’s most admired companies for twelve years. Image provided by Calkain.

The current economic climate does not give grounds for Berkshire – or indeed any DaVita investor – to divest the stock. The firm stated plainly that its Q1 2020 results, due to be reported on 05/05/2020, suffered no significant impact from the effect that the coronavirus outbreak has had on the global economy. DaVita’s short-term finances are in good shape to cope with the present economy as well, as total current liabilities of $2.37 billion are offset by total current assets of $3.69 billion, cash-on-hand worth $1.21 billion, short-term investments worth $11.57 million, and total accounts receivable of $2.31 billion.

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DaVita’s long-term finances are not quite as solid, as long-term debt of $10.7 billion outpaces the firm’s net worth of $3.5 billion, but DaVita’s profitability will ensure that it is able to service these debt payments. And DaVita’s growth prospects will also aid it. The U.S. dialysis market is projected to register more than 4% CAGR between 2019 and 2025, as an aging population will enable a strong player like DaVita to continue being profitable going forward. Indeed, earnings-per-share growth over the next five years is projected to be 18.54%. These factors make DaVita an excellent candidate as a growth stock, but at present it is also a value stock.

At close of market on 04/17/2020, DaVita traded at $78.16 per share. Chart generated by FinViz.

At close of market on 04/17/2020, DaVita traded at a share price of $78.16 with a price-to-earnings ratio of 16.53, based on earnings-per-share of $4.73. The current P/E is lower than the five-year average P/E of 23.70, lower than the ambulatory health care services sub-sector average of 28.57, and lower than the S&P 500 (SPY) average of 19.72. In fact, with the exception of its price-to-book ratio, DaVita appears to be trading at a discount to both its sub-sector and the broader index.

Metric DaVita Sub-Sector Index
P/E 16.53 28.57 19.72
P/CF 3.88 11.35 11.36
P/B 4.54 3.38 2.53
P/S 0.85 1.01 1.78

Figures collated from FinViz, Morningstar, and TheStreet.

So what is fair value for DaVita? To determine fair value, I will first divide the current P/E by the historical market average of 15 to get a valuation ratio of 1.10 (16.53 / 15 = 1.10) and divide the current share price by this valuation ratio to get a first estimate for fair value of $71.06 (78.16 / 1.10 = 71.06). Then I will divide the current P/E by the five-year average P/E to get a valuation ratio of 0.70 (16.53 / 23.70 = 0.70) and divide the current share price by this valuation ratio to get a second estimate for fair value of $111.66 (78.16 / 0.70 = 111.66). Finally, I will average out these estimates to get a final estimate for fair value of $91.36 (71.06 + 111.66 / 2 = 91.36). On the basis of this estimate, the stock is undervalued by 15%.

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To summarize, DaVita is a major player in the U.S. dialysis provision sector, and has a considerable international presence too. It has excellent growth prospects, and is currently trading at a 15% discount to fair value. Prospective investors should seriously consider taking a place alongside Berkshire Hathaway as a shareholder in this solid healthcare company.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.