DaVita Is Looking Healthy - Barron's

| About: DaVita HealthCare (DVA)

The nation's second-largest chain of kidney dialysis clinics, DaVita (NYSE:DVA) hasn't seen much of a bump from the market's recent rally. But with profits climbing and the U.S. population aging, Barron's Johanna Bennett says DaVita is a compelling buy.

DaVita shares have risen just 5% since the rally began in March, largely because investors were worried about health-care reform and whether the shaky economy would hurt payments from private insurers. However, kidney-failure patients must have dialysis to survive, and the demand for dialysis is growing in America. Private insurance payments, which make up 1/3 of DaVita's revenues, have remained strong thus far.

The company controls 27% of the U.S. market, treating 110,000 kidney-failure patients. As the population grows and baby boomers age, demand for dialysis could jump over 50% by 2020.

DaVita's revenue last year topped $5.6B. Bad debt was a low 2.5% of total sales because 72% of DaVita's patients are on Medicare. Medicare reimbursements are expected to remain stable next year, but the program could be changed in the future, potentially hurting (or helping) DaVita's bottom line. The company also makes a significantly fatter profit on private insurance payments than on Medicare reimbursements, but there are some signs more patients will shift to Medicare, hurting DaVita's profitability.

Despite some Medicare uncertainty, profits are expected to climb 8% this year and another 10% in 2010 to $4.17/share. The stock recently closed at $45.89.

  • Gary Lieberman, of Wachovia, thinks shared could climb 22-27%.
  • On Monday, Piper Jaffray raised its rating of DaVita to Buy from Neutral, noting the company's "ability to efficiently grow with no observed impact from the weak economy."

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  • DaVita (DVA): Q1 EPS of $0.92 beats by $0.01. Revenue of $1.45B (+7.7%) in-line. Reiterates operating-income guidance. (PR)