Seeking Alpha
Large-cap
Profile| Send Message|
( followers)  

Recent SEC filings show that Warren Buffett's Berkshire Hathaway is buying shares of DaVita (DVA). Reviewing the financials of the company, it is easy to see its value. This is a classic Buffett stock. Over the last decade, the company has consistently produced significant free cash flow. Throughout this time period, earnings and revenue have grown. The company has a strengthening balance sheet, and it has demonstrated its ability to maintain profit margins.

DaVita is a provider of kidney dialysis services. Chronic kidney disease has no cure, and severe cases require dialysis (the filtering of the patient's blood). While kidney transplants are preferable, there is a shortage of available kidneys. Regularly scheduled dialysis treatment sessions are the most practical solution. DaVita provides dialysis services through network of over 1,800 treatment centers. The company is aggressively expanding operations through its acquisition of NephroLife and its merger with HealthCare Partners Holdings. Both consolidations were done this year. Given the necessity of regular treatment sessions, the company can produce consistent cash flows. The demographics of the healthcare industry are also in the company's favor. This makes the business well-positioned to maintain earnings and revenue growth.

Insurance reimbursements are critical to the profitability of DaVita. Kidney dialysis providers are facing pressure from insurance companies to lower their rates for insured patients. If insurance companies are able to negotiate better rates, it could have a disproportionate impact on the company's earnings. As a result, DaVita is aggressively acquiring smaller dialysis operators and growing its market share. This should give DaVita the ability to deal with the pricing pressures. The maneuvering will allow DaVita to continue to generate significant cash flows in the coming years.

Earnings and Revenue

As a result of the mergers, analysts forecast a 72% increase in DaVita's revenue this year. The corresponding increase in earnings is forecast to be 21%. The uptick in earnings is complimented by a trend of increasing earnings and revenue growth over the last decade.

Click to enlarge images.

Free Cash Flow and Shareholder Yield

The company has strong free cash flow. It is over 9% of DaVita's market capitalization this year. The consistent free cash flow enables DaVita to grow its dividend and share buyback programs. While the dividend sits at 1.1%, the company has repeatedly increased its payout over the past five years. As earnings grow, there is room to enhance the dividend payout. There has been an increase in the debt levels in the most recent two years. This was primarily done to finance its acquisitions. Given the significant free cash flow, it is very likely that DaVita will be able to reduce its debt levels.

Valuation

The company has a reasonable valuation. Its P/E multiple of 18 is reasonable given earnings growth of 20% for the next two years. This fiscal year has already had three quarters of solid performance. DaVita is poised to provide significant investor returns if it posts another good quarter.

Data source: Edgar Online, Inc.

Source: Buffett Eyes DaVita As A Long-Term Investment