DaVita: Solid Valuation And Cash Flow, Price Recovering After SCOTUS Ruling

Sep. 28, 2022 5:07 PM ETDaVita Inc. (DVA)BIIB, LLY, XLV2 Comments

Summary

  • The Health Care sector has been a source of relative safety during this tumultuous September.
  • While some large-caps in the space are catching bids, one smaller health care services and facilities company is sharply lower in 2022.
  • Earnings are expected to improve, but there's work to do on its chart.

Unrecognizable doctor holding highlighted handrawn Kidneys in hands. Medical illustration, template, science mockup.

mi-viri

Positive drug news recently out of Biogen (BIIB) and Eli Lilly (LLY) helped send those stocks back to near 52-week highs this week. There are plenty of positive fundamental and technical tailwinds for the defensive sector, but not all of its industries are created equal.

Health Care Providers and Medical Care Facilities are two struggling areas. One S&P 500-listed stock in the space features an attractive valuation, but a June Supreme Court decision dinged this year's profits. Is it a value now? And what does the chart say?

Year-To-Date Returns: Green Spots In Health Care. Medical Care Equities Down Big.

Year-to-Date Returns: Green Spots in Health Care. Medical Care Equites Down Big.

Finviz

According to Bank of America Global Research, DaVita Inc. (NYSE:DVA) is a leading dialysis provider in the United States. It provides kidney dialysis services for patients suffering from chronic kidney failure. The company operates over 2,700 outpatient clinics in the U.S. and serves over 200,000 patients. DaVita also operates in countries outside of the US. The company features modest long-term growth despite earnings volatility in recent years and in 2023. It is also less levered to its industry's operating cycle than some competitors, though BofA highlights regulatory risks to commercial pricing. For background, the Marietta vs. DaVita ruling by the SCOTUS in June sided with the health plan, which allowed self-insured plans to exclude certain dialysis providers. BofA believes that should result in a 15% revenue cut, slashing the earnings picture.

Upside risks include better insurance plan volumes with more commercial demand along with more favorable reimbursement rates. Moreover, a faster shift toward Medicare Advantage recipients' usage of DaVita's services would promote improved earnings.

The Colorado-based $7.6 billion market cap Health Care Providers trades at a low 10.6 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal.

On earnings and valuation, per-share profits are solidly in the black, but the growth rate is volatile. This past June's negative SCOTUS ruling results in a much lower earnings figure for 2022. The upshot is EPS is seen as rebounding sharply next year and at a still-solid pace in 2024. While its EV/EBITDA multiple does not scream cheap, strong free cash flow makes me lean toward the inexpensive side on DaVita's valuation.

DVA Earnings, Valuation, And Free Cash Flow Forecasts

DVA: Earnings, Valuation, Free Cash Flow Forecasts

BofA Global Research

Looking ahead, Wall Street Horizon's corporate event data show an unconfirmed Q3 earnings date of Thursday, October 27. The calendar is light aside from that. Ahead of its quarterly report, DVA beat earnings estimates back in July.

Corporate Event Calendar

Corporate Event Calendar

Wall Street Horizon

The Technical Take

DVA has managed to hang on to its June lows so far, as the broad market threatens to break down below those lows. You can see the volume spike around the unfavorable SCOTUS decision back then, but also notice how the bulls stepped up to bring shares sharply higher the next day. That $75 price level is critical to hold.

Unfortunately for the bulls, though, there's clear resistance in the mid-$90s. To break the downtrend, that level should be recaptured.

DVA Shares Bounce From A Bad SCOTUS Ruling, But Work For The Bulls To Do

DVA: Shares Bounce From A Bad SCOTUS Ruling, But Work For The Bulls To Do

Stockcharts.com

The Bottom Line

The valuation and profitability after this year look attractive to me with DaVita, but the stock must hold its June low and/or climb above the summertime range-highs. It's in no-man's land at the moment. Being long here is fine, but a stop under $75 is the prudent play.

This article was written by

CFA & CMT Charterholder | Freelance Financial Writer at SoFi & Ally | Investments | Markets | Personal Finance | RetirementI create written content used in various formats including blogs, emails, white papers, and social media for financial advisors and investment firms in a cost-efficient way. My passion is putting a narrative to financial data. Working with teams that include senior editors, investment strategists, marketing managers, data analysts, and executives, I contribute ideas to help make content relevant, accessible, and measurable. Having expertise in thematic investing, market events, client education, and compelling investment outlooks, I relate to everyday investors in a pithy way. I enjoy analyzing stock market sectors, ETFs, economic data, and broad market conditions, then producing snackable content for various audiences. Macro drivers of asset classes such as stocks, bonds, commodities, currencies, and crypto excite me. I truly enjoy communicating finance with an educational and creative style. I also believe in producing evidence-based narratives using empirical data to drive home points. Charts are one of the many tools I leverage to tell a story in a simple but engaging way. I focus on SEO and specific style guides when appropriate. My CFA and CMT backgrounds demonstrate prowess in investment management and my professional experience includes extensive public speaking and communication. Moreover, my extensive university teaching and professional trading experience provide useful skills. Past roles also include heavy use of Excel modeling and chart creation as well as PowerPoint.I am a contributor to The Dividend Freedom Tribe. I am a contributor to Topdown Charts.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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