DaVita Inc. Fundamental Analysis
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DaVita Inc.
Last Updated: 22 Apr 2024
NYSE: DVA
GICS Sector: Healthcare
Sub-Industry: Medical Care Facilities
Table of Contents
You can download a summary of DaVita Inc's fundamental analysis in PDF here.
Management
CEO: Javier Rodriguez
Tenure: 4.8 years
Since 15 Jun 2020, Mr. Javier Rodriguez has served as an Independent Director at Gilead Sciences, Inc. and has been the Chief Executive Officer and Executive Director of DaVita Inc. since 1 Jun 2019.
He previously held roles including President, Senior Vice President, and Vice President of Operations at DaVita Inc., where he joined in 1998. Before that, he worked in finance at Baxter Healthcare Corporation from 1995 to 1996 and served as Director of Operations for CBS Marketing Inc. in Mexico City.
Mr. Rodriguez holds a BS in Finance and Marketing from Boston College, an MBA from Harvard Business School, and completed an executive program at Stanford Graduate School of Business. He was recognized by Modern Healthcare as one of the 100 Most Influential People in Healthcare in 2019 and 2020, and in 2015, he was named one of the Top 10 Leaders by Hispanic Executive magazine.
Let us now analyze the CEO’s compensation.
DaVita Inc. CEO Compensation Analysis. Source: Simply Wall St
The total compensation refers to the sum of all forms of payments and benefits received by the CEO per year. This can include salary, bonus, stock options, and other perks.
From the graph above, the CEO’s compensation has been consistent with the company's performance over the past year. This can generally be a positive indication.
CEO pay tied to performance metrics can be a signal of strong company governance. It shows the board of directors is considering financial results when determining compensation, and not just overpaying regardless of performance.
Looking broadly at DaVita Inc.’s management team, it has an average tenure of 5.7 years. It is considered experienced.
Business Overview
DaVita Inc. is one of the largest providers of kidney care services in the U.S. that provides kidney dialysis services for patients suffering from chronic kidney failure.
Chronic kidney disease (CKD) has five stages, reflecting declining kidney function (waste and fluid filtering). Stage 1 is closest to healthy kidneys, while Stage 5 indicates near-complete failure.
At Stage 5, patients enter end-stage kidney disease (ESKD) and require dialysis or a transplant for survival. There are two types of dialysis: Hemodialysis and peritoneal dialysis.
Hemodialysis, the more common treatment for ESKD, cleanses blood via a dialyzer, an artificial kidney. During treatment, blood flows through one chamber of the dialyzer, while a special fluid circulates through another. A semi-permeable membrane separates these chambers, allowing waste products and excess fluids to pass from the blood into the fluid, which is then discarded.
Peritoneal dialysis, a home-based treatment, utilizes the patient's peritoneal or abdominal cavity to remove waste and excess fluid. Unlike hemodialysis, which requires frequent clinic visits, peritoneal dialysis offers flexibility, making it suitable for healthier patients seeking greater independence.
Because loss of kidney function is normally irreversible, ESKD patients generally require regular life-sustaining dialysis therapy for the rest of their lives or until they receive a kidney transplant.
The treatment for CKD (before Stage 5) focuses on slowing progression and preserving function through managing co-existing conditions like diabetes and hypertension. This typically involves lifestyle modifications and collaboration with specialists to preserve kidney function as long as possible.
However, if CKD advances, the goal shifts to preparing the patient for the dialysis treatment of their choice.
DaVita operates in two segments, U.S. dialysis and Ancillary services.
U.S. dialysis business segment
The company's core business is U.S. dialysis, serving CKD patients through a vast network of outpatient centers and established partnerships with nephrologists and payers. As of 31 Dec 2023, they dialyze roughly 200,800 patients across 2,675 outpatient centers in 46 states and D.C., with additional contracts for inpatient dialysis services in 790 U.S. hospitals.
DaVita’s U.S. dialysis services provide:
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Outpatient hemodialysis services
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Hospital inpatient hemodialysis services
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Home-based dialysis services which include home hemodialysis and peritoneal dialysis
The following graph summarizes the U.S. dialysis treatments by modality and U.S. dialysis patient service revenues by modality for the year ended 31 Dec 2023.
U.S. dialysis treatments by modality and U.S. dialysis patient service revenues by modality for the year ended 31 Dec 2023
Other services include:
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ESKD laboratory services – DaVita operates a separately licensed and highly automated clinical laboratory which specialises in ESKD patient testing
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Management services – The company manages 59 outpatient dialysis centers across the U.S., either through ownership or service agreements. These centers generate management fees based on revenue or collections.
The sources of its U.S. dialysis revenues are principally from government-based programs, including Medicare and Medicare Advantage plans, Medicaid and managed Medicaid plans and commercial insurance plans.
Ancillary services business segment
This segment consists primarily of DaVita’s U.S. integrated kidney care (IKC) business, certain U.S. ancillary businesses such as clinical research programs, transplant software business and venture investment group, and its international operations.
IKC helps health plans and government programs manage CKD and ESKD for their members. They use a combination of data analysis, care coordination, and technology to improve patient outcomes and reduce healthcare costs. Their revenue comes from fixed fees or performance-based contracts with health plans and government programs.
DaVita also offers separate services to help nephrologists manage their practices. Nephrology Practice Solutions (NPS) helps recruit doctors and handle administrative tasks, allowing them to focus on patient care. NPS earns revenue through flat fees or a share of the doctor's collections.
As of 31 Dec 2023, the company's international dialysis network had grown to 367 outpatient centers across 11 countries, serving nearly 49,400 patients.
The international outpatient dialysis centers
DaVita’s U.S. dialysis segment revenues represent approximately 89% of its consolidated revenues for the year ended 31 Dec 2023.
DaVita Inc. Reportable Segment Revenue For the Fiscal Year Ended 31 Dec 2023. Source: Gurufocus
Trends, Competition, and Strategy Overview
DaVita is a leading provider of kidney care, offering patients a variety of treatment options throughout their journey. They focus on early diagnosis, transplant support, and in-home care.
Their patient-centric approach prioritizes choice and quality, as evidenced by top rankings in national programs like the Centers for Medicare & Medicaid Services (CMS), Quality Incentive Program (QIP) and the Five-Star Quality Rating system. These programs independently assess dialysis facilities based on patient outcomes, making DaVita's leading position a strong indicator of its effectiveness in delivering high-quality care.
DaVita employs experienced medical professionals, including a team of nephrologists, to deliver superior care. They also advocate for value-based care models that encourage collaboration and improve outcomes for patients. Their IKC business further promotes integrated care through various payment structures.
Data from the US Renal Data System (USRDS) shows an increasing number of ESKD dialysis patients in the US. The population grew at a steady rate (around 3.3%) between 2011 and 2021, with a slight slowdown in 2020-2021. This slowdown might be due to the initial effects of COVID-19 on this patient group.
Several factors can influence this growth, including patient mortality, population aging, transplant rates, and the rise of chronic diseases like diabetes. Furthermore, future advancements in treatments may affect the demand for dialysis. The COVID-19 pandemic has also specifically impacted mortality rates among these patients.
The U.S. dialysis market is a fierce battleground. DaVita faces established giants and nimble newcomers alike. Competitors fight for acquisition targets, patients, and qualified medical personnel. This competition extends globally as DaVita expands internationally.
Beyond traditional providers, DaVita grapples with individual nephrologists and even former partners who launch their dialysis units. Negotiating favorable contracts with healthcare payers and hospitals adds another layer of complexity.
DaVita's main competitor, Fresenius Medical Care, holds a potential cost advantage by manufacturing its dialysis equipment. DaVita is even contractually obligated to purchase a certain amount of this equipment from Fresenius until 2024.
The fight extends beyond dialysis. As DaVita strives to offer a wider range of kidney care services, competition emerges from other providers and even non-traditional players. These rivals have significant resources and are actively pursuing the entire spectrum of kidney care, potentially impacting patient growth and industry dynamics.
DaVita is setting its sights on a rebound in 2024. After COVID-19 disrupted patient care and treatment volume, the company anticipates a return to growth. This optimism stems from declining pandemic-related mortality rates and a stabilizing patient population.
DaVita is also sharpening its financial claws. By streamlining its billing processes and implementing cost-saving measures, the company expects to see a rise in adjusted operating income. However, inflationary pressures and a tough labor market continue to be thorns on DaVita's side, potentially squeezing profit margins.
Looking ahead, DaVita remains committed to innovation. The company plans to ramp up investments in integrated kidney care and value-based care initiatives, positioning itself for a future-proof healthcare landscape.
DaVita Inc. Economic Moat
There are many ways to identify DaVita Inc.’s economic moat, but I focus on these 5 sources. The rating is purely subjective and is based on my in-depth understanding of the company.
DaVita Inc. Economic Moat
Economic Moat: Narrow
DaVita has leveraged its extensive network of dialysis clinics, built over decades, into a powerful intangible asset. This network, coupled with its strong brand reputation for quality service, fosters vital relationships with nephrologists who are the lifeblood of their business – referrals.
DaVita prioritizes maintaining high-quality metrics, a critical factor in this healthcare niche. Transparency around clinic quality is bolstered by publicly available ratings from the Centers for Medicare and Medicaid Services, showcasing DaVita's consistent performance compared to smaller players. This demonstrably superior quality, evident in factors like hospitalization rates and patient outcomes, directly influences doctor referrals.
The company further strengthens these relationships through strategic partnerships. A significant portion of DaVita's revenue comes from joint ventures with nephrologists, who hold ownership stakes in the clinics. This incentivizes them to refer patients to these specific facilities, creating a valuable intangible asset.
Location also plays a key role in DaVita's strategy. Recognizing the importance of convenience for patients undergoing frequent, time-consuming dialysis treatments, the company strategically locates clinics in easily accessible areas. This convenience also creates a mild switching cost – patients settled into high-quality, convenient centers are unlikely to switch facilities.
Beyond its intangible assets, DaVita enjoys cost advantages over various players in the healthcare system.
First, outpatient dialysis clinics, like DaVita, are inherently cheaper than hospitals for treating chronic illnesses. This is because outpatient facilities have lower overhead costs and receive lower reimbursement rates from insurers due to this advantage. This creates a strong incentive for insurers to steer patients with ESRD towards outpatient care.
Furthermore, DaVita, along with its major competitor Fresenius, hold a significant market share, collectively treating about 75% of outpatient dialysis patients in the US. This dominance grants them leverage when negotiating prices with commercial insurers, a primary source of revenue in dialysis services. Unlike other healthcare sectors, where the top players hold a smaller share, DaVita and Fresenius can secure much higher rates from commercial insurers compared to what the government would pay for the same treatment. This pricing power directly contributes to DaVita's profitability.
Finally, DaVita's size grants them cost advantages over smaller dialysis clinics.
Studies suggest higher-volume facilities like DaVita's have a lower cost per treatment. This efficiency likely stems from standardized operations, allowing them to operate clinics with higher capacity, better utilization, and fewer staff compared to smaller peers. Additionally, DaVita's larger scale grants them greater negotiating power for supplies and pharmaceuticals, further reducing their treatment costs.
DaVita Inc. Performance
My quick performance checklist:
Has DaVita Inc.'s revenue consistently grown year over year for the past 5 years? Yes.
Is the net income consistently increasing year over year for the past 5 years? No, it is inconsistent.
Has the cash flow from operating activities shown consistent year-over-year growth for the past 5 years? No, it is on a downtrend from the fiscal year 2019 to 2022. The operating cash flow then reverses upwards in 2023.
Has the free cash flow remained positive for the past 5 years? Yes.
Is the gross margin % consistent or growing over the past 5 years? It is consistent at around 30%.
Has the EPS shown growth over the past 5 years? No, it dips in 2022 before rebounding back in 2023.
DaVita’s revenue grew across the board, with the U.S. dialysis segment leading the charge at 3.2%. This bump came from squeezing an extra $12.20 per treatment out of their average patient services revenue.
The international and IKC businesses followed suit, with international operations up 9.0% and IKC soaring by a whopping 35.2%. This IKC growth was fueled by $55 million in shared savings and a continued influx of patients.
On the cost side, DaVita sharpened its pencils. They slashed spending on pharmaceuticals, contract wages, and advocacy. However, this cost-cutting crusade wasn't without its casualties. Compensation expenses, severance, and center closure fees all rose as the company restructured its operations. Legal battles and investments in IKC support functions also put a dent in profits.
Despite these growing pains, DaVita expanded its reach. They strategically shut down 49 underperforming U.S. centers to optimize capacity, while simultaneously adding 17 new international locations.
The patient base also flourished, with a modest 0.7% increase in U.S. dialysis patients and a stellar 8.4% jump internationally. IKC remained a patient magnet, bringing the total under its care to a staggering 75,000.
DaVita Inc. Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Has free cash flow per share increased over the last 5 years? Yes.
DaVita Inc. FCF per Share
Management Effectiveness
Has DaVita Inc.'s ROE stayed within or above the 12%-15% range year over year for the past 5 years? Yes. However, this metric may be skewed due to their high level of debt.
DaVita Inc. Return on Equity
Has the ROIC stayed within or above the 12%-15% range year over year for the past 5 years? No, it has been around 8%.
DaVita Inc. Return on Invested Capital vs Weighted Average Cost of Capital
When a company's ROIC is greater than its WACC, it signifies that the company is generating returns on its investments that are higher than the cost of financing those investments. In simpler terms, the company is making more money on its projects than it costs to fund them. This indicates efficient capital allocation and value creation for shareholders.
The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.
The company's board authorized a $2 billion share repurchase program in Dec 2021. This program allows the company to buy back its shares on the stock market or through private deals.
As of Feb 2024, $1.149 billion remains available to buy back more shares, excluding taxes. There is no set deadline to complete this program, but the company's borrowing agreements may limit how much it can spend.
DaVita Inc. Shares Outstanding (Million Shares)
DaVita Inc. Financial Health
DaVita Inc. Financial Health (USD Million)
Current Ratio: 1.2 (pass my requirement of >1.0)
The trend of its current ratio has been decreasing over the past 5 years, and it is worse than the industry average.
Debt-to-EBITDA: 4.8 (fail my requirement of <3.0)
Interest Coverage: 4.0 (pass my requirement of >3.0)
Debt Servicing Ratio: 19.4% (pass my requirement of <30.0%)
DaVita Inc. Intrinsic Valuation
Estimated intrinsic value: USD $186.49
Value is calculated using the discounted cash flow method (considering their cash and debt) and scenario planning.
Average free cash flow used: USD $1,300M
Projected growth rate: 7% - 10%
Beta: 1.0
Discount rate: 8.2%
Ideal margin of safety: 50% (Uncertainty: Mid)
Price range after the margin of safety: <USD $94.00
Date of calculation: 22 Apr 2024
DaVita Inc. Valuation
I use the past 5 years' free cash flow and apply a weighted average, giving more focus on the recent years. I then round the average to the nearest tens. In some instances, I use a more realistic number to represent the free cash flow.
The total debt and cash and short-term investments are the last quarter figures that are rounded to the nearest tens. In some instances, I use more realistic numbers to represent them.
DaVita Inc. Intrinsic Valuation
DaVita Inc. Relative Valuation
DaVita Inc. Price-Earnings Ratio vs its Peers
DaVita Inc. Historical Price-Earnings Ratio
Additional Resources
I recommend reading The Five Rules for Successful Stock Investing as it greatly helps in my stock analysis. If you want a complete collection of recommended books, please visit here.
My Concerns
DaVita's business relies heavily on patients with commercial health insurance. These plans pay DaVita significantly more than Medicare or other government programs. A shift in patients to government programs or a decline in commercial insurance coverage would hurt DaVita's profitability.
Here are some of the factors that could cause this shift:
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Changes in employment status: If people lose their jobs, they may lose their employer-sponsored health insurance.
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Reduced availability of commercial plans: The Affordable Care Act marketplaces may become less stable, and fewer commercial plans may be available.
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Payors stopping coverage after 30 months: Some commercial payors stop covering patients after 30 months of dialysis treatment.
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Economic downturns: Economic downturns can lead to job losses and a decline in employer-sponsored health insurance.
DaVita negotiates with commercial payors to maintain favorable rates and coverage. However, these negotiations are complex and competitive, and unfavorable outcomes could hurt DaVita's finances.
In addition, some commercial payors are trying to limit coverage for kidney disease patients. This could reduce the number of patients with commercial insurance or decrease the reimbursement DaVita receives.
DaVita also relies heavily on Medicare for dialysis patient revenue. This dependence creates several risks.
Medicare payment cuts, coverage limitations, and regulatory changes could hurt revenue. Furthermore, state Medicaid programs might adopt unfavorable payment systems or tighten eligibility, reducing patient volumes and reimbursements. These factors could threaten DaVita's financial health.
DaVita's growing focus on home-based dialysis, a currently booming area, presents significant challenges alongside opportunities. While the company invests heavily in this modality, there are inherent risks.
Regulatory scrutiny is intensifying and managing the complex logistics – staffing, training, billing, and legal compliance – becomes even more crucial with expansion. The evolving kidney care market presents new competitors who may find it easier to enter the home-based dialysis space.
DaVita's ability to adapt to these dynamics, including potential regulatory shifts, will be critical to avoid losing patients or hindering growth in this key area. If the company stumbles in its home-based dialysis strategy, its financial performance and reputation could suffer.
DaVita's business model could face long-term disruption from advancements in drugs or technologies that reduce dependence on dialysis. One potential threat lies in regenerative medicine, which aims to restore organ function. Additionally, breakthroughs in obesity management – like more effective drugs – could slow disease progression and ultimately decrease the need for dialysis.
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