Update: DaVita Is Still Undervalued, Despite Headwinds

| About: DaVita HealthCare (DVA)


While DaVita's dialysis business increased guidance, HCP continues to struggle.

These are of course unexpected issues that prompt me to revise slightly downwards my near-term profit estimates.

Over the long term I still believe that DaVita will continue to deliver market beating returns.

On July 31 DaVita (NYSE:DVA) delivered a mixed bag of results: While the legacy dialysis business is doing unexpectedly well and can even increase guidance, the acquired HCP business continues to struggle due to bad management. These issues prompted Kent Thiry, DaVita's CEO, to step in personally to run HealthCare Partners for the foreseeable future. All in all, investors should expect that HCP's issues will be fixed rather sooner than later and that the legacy business will continue to do well.

DaVita now expects 2014 consolidated operating cash flow to reach between $1.450 and $1.550 billion, which I estimate to result in FCF/share of about $5. While this is somewhat lower than I had expected, in spite of the HCP issues and stiff headwinds from the reimbursement side, this figure still represents a 20%+ growth rate compared to the FCF/share achieved in the rolling 12-month period to June 30, 2013 of $4.06.

Hence I would expect slightly lower earnings in the near term, but still confirm my (rather cautious) long-term estimates published on October 24, 2013 in my very first article on DaVita. Owner Earnings per share should reach at least $7 in 2018. Considering an appropriate FCF multiple of 15-16, the stock should trade above $110 in four years, providing a CAGR of 12%.

Disclosure: The author is long DVA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.