page contents DaVita, Inc. (DVA) Stock Analysis

DaVita, Inc. (DVA) Stock Analysis

Updated: Feb 4

Current price: $82.90


Market cap: 10.49B


Overall assessment: HOLD


Why did it pique my interest?


  1. DVA stock after bottoming at $44 in June had grown to $82 in just 8 months, including an overnight gap in the price of nearly $10 in November when it released its Q2 2019 results.

  2. DVA PEG is under 1, meaning the stock is undervalued even at the current price.

  3. Stock is in Warren Buffet’s portfolio. Source: https://www.nasdaq.com/articles/10-of-the-cheapest-warren-buffett-stocks-2020-01-24

  4. Not sure why, but Zacks is going crazy about this stock with like 40 articles in the past few months.


Now, the stock did grow quite a lot in the past year. It also hit an all-time high of $84 just yesterday. Depending on how the stock price behaves in the next week will depend on whether it will retract or continue to climb. We will look at the fundamental factors behind recent growth and check if it still has the power to grow in 2020.



Overview: company, category description


DaVita, Inc. engages in the provision of medical care services. It operates through the following two segments: US Dialysis and Related Lab Services; and Other-Ancillary Services and Strategic Initiatives. The US Dialysis and Related Lab Services segment offers kidney dialysis services in the United States for patients suffering from chronic kidney failure. The Other-Ancillary Services and Strategic Initiatives segment consists primarily of pharmacy services, disease management services, vascular access services, clinical research programs, physician services, direct primary care, end-stage renal disease seamless care organizations, and comprehensive care. The company was founded in 1994 and is headquartered in Denver, CO.



Stock price analysis


Looking at the stock price, the recent move is a bit extreme. Yes, it suddenly came out of loss in Q3-Q4 2018 and increased its EPS significantly in 2019 (in Q1-Q3 2019) which led to a burst of revised targets for the stock in 2019.

Source: https://www.zacks.com/stock/chart/DVA/price-consensus-eps-surprise-chart


Now that the stock reached its latest target price + it hit the all-time high of $84, the question is where the stock price will move next. The stock appreciated very quickly in the past few months with gaps in price. This may mean that the stock needs to cool off for a bit. It is likely going to take a break and retract to $68 range.

Does it have enough to do another run after it retracts? We will see in the next parts of our analysis.

Source: https://www.tradingview.com/chart/?symbol=NASDAQ%3ASTN



Financial overview


The problem with DVA stock is that it is growing sales at a very slow pace. It is generating more profit recently for 2 reasons:

  1. In Q3-Q4 20,18 net profit was reduced by $500K loss from discontinued operations. Now that is gone.

  2. By working slightly more efficiently, in other words reducing costs.

https://www.zacks.com/stock/chart/DVA/fundamental/eps-diluted-ttm


However, for some companies the leverage of sales to profit is very high. Let’s check that. In Q2 it grew sales by 3.63% and net income increased 61.51%. Now, in Q3 2019 sales grew by 2.16%, but net income decreased due to unusual expenses of $105K. If we add that back to profit net profit would have been ~$288K, which is a 48% increase.

Now that means the leverage is 61.51% /3.63% = 17 times in Q2 and 48%/2.16% = 22 times in Q3. So, on average 20 times, meaning for every 1% sales increase profit would grow 20%. Not bad at all.

https://www.marketwatch.com/investing/stock/dva/financials/income/quarter


The key question becomes: will it continue to grow revenue?

Unfortunately, searching the web, reading through their financial statements I was not able to find anything of nearing breakout in terms of new products or partnerships that could increase their sales.



Key financial ratings/Stock Value


As seen in the graph below the analysts think, the recent growth in EPS will continue into Q4’19, but after that it will slightly decline, but generally will keep above 2018 levels. Hence, EPS for 2020 is estimated at 5.55 vs. this year’s estimate of 5.22. That is 6% growth.


While less reliable, EPS prediction for 2021 is 6.,51 and for 2022 is 6.77. This is 17% growth for 2021 and 4% for 2022. Really not a lot. And this seems to be reflected in the current low forward PE (14.93) and PEG (Price-to-Earnings-to-Growth) of 0.95. While such low numbers of PE and PEG may mean the stock is undervalued and will grow, it may also be low for a reason: there is little expected growth in Profit (PE) in the long term (3+ years).

Source: https://www.nasdaq.com/market-activity/stocks/dva/earnings


https://www.marketwatch.com/investing/stock/dva/analystestimates


https://www.zacks.com/stock/chart/DVA/eps


There are no major issues with long-term debt for D,VA as all scores are good. It is a bit high on short-term debt, but then it has good cash reserves.

https://www.marketwatch.com/investing/stock/dva/profile



Ratings by analysts


Rating from Zack is 3, but they give a 3 to like 90% of the stock. Looking at their ratings for Value, Growth, Momentum and the summary VGM metric they are giving the stock an A.

https://www.zacks.com/stock/chart/DVA/eps


There are currently 14 analyst recommendations for the stock with 10 saying hold and 4 saying buy. While this gives an overall score of ‘Overweight’ I am skeptical about this score with 10 analysts saying ‘hold’ (more than double those who say ‘buy’). Average target price for these 14 analysts is 76.91.

https://www.marketwatch.com/investing/stock/dva/analystestimates


Lastly, Nasdaq compiled ratings of 8 analysts w,ho on average say ‘buy’. However, average target price for the stock is $76.67. In both Marketwatch and Nasdaq the target price is behind the current price of $82. The ratings from analysts are likely behind with the recent aggressive growth of the stock price.

https://www.nasdaq.com/market-activity/stocks/dva/analyst-research



Who owns it? Changes in ownership


The stock is heavily owned by institutions with 96.46% of stock float owned by 128 institutions. However, in the most recent quarter there was some softness in ownership with more companies disposing their shares, than adding. The number of disposed shares is also 4 times higher than added positions. While the numbers of added vs. disposed shares are still small compared to total number of shares owned by institutions.

https://www.nasdaq.com/market-activity/stocks/dva/institutional-holdings



Buzz (StockTwits, Investment board)


Recently the number of tweets about DVA stock increased as it reached its high point. On average there are 20 tweets in normal times, during heavy price action number of tweets goes up to 50 or more. Number of tweets is quite small compared to other, ‘hot’ stocks, so there is little interest from public investors.

The number of people following the stock on https://investorshub.advfn.com/ is very small. In reality the conversation about DVA is dead there.




Risks


The main risk for DVA is stagnation. It is unlikely to decline in sales or profit as it has contracts with medical institutions across the USA for many services. However, the company was growing sales at 2-3% a year, which is just enough to cover inflation. While it did see growth in profit due cost-cutting, some of that comes from unfair treatment of long-standing staff, hiring staff with less experience and giving them bulk of work. In the end this may hit DVA back with loss of clients. Also, there is a limit on how much you can cut costs.



Overall assessment and summary


Due the o low growth in sales and the other risks discussed in the Risk section this company is somewhere in between Sell and Hold. I will give it a Hold as estimates are saying it can push its EPS a bit higher in the next 2 years, meaning its PE will go to around 11-12 in 2 years at current price. However, the stock growth is likely going to be limited.


Overall assessment: Hold



Have an idea about DVA? You have a different opinion about this stock? I made an error in assumptions? You have additional information to share? Please leave your comments below.


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