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We have reiterated our Neutral recommendation on DaVita HealthCare Partners Inc. (DVA - Analyst Report) based on the various positives, which offset the negative factors such as higher expenses and high dependence on commercial payors and government reimbursements.

Why Reiterate?

DaVita has been generating strong operating cash flow accruing from improved earnings, robust cash collections and the timing of payments for working capital expenditures. Operating cash flow increased at a 3-year CAGR (2009–2012) of 18%. Similar growth is expected in the future as well, as reflected by the operating cash flow guidance of $1.35–$1.50 billion for 2013.

Moreover, DaVita is slowly expanding in the domestic and international markets through acquisitions and alliances. Earlier this month, this Zacks Rank #3 (Hold) stock entered Columbia by acquiring a majority stake in Esensa S.A.S.

In Jan 2013, DaVita acquired 5 dialysis centers in Portugal and 4 in Poland from rival Fresenius Medical Care. In the same month, the company also entered Taiwan through a joint venture with Riches Healthcare to form DaVita Taiwan. Further, in the first quarter of 2013, DaVita acquired 8 centers and opened 27 centers in the U.S. and opened 1 center outside the U.S.

However, DaVita’s dependence on commercial payors and government reimbursements is a cause of concern. Moreover, the company has a significant amount of debt burden. In fact, the company has not repurchased any shares since Jul 2011, in order to conserve cash for acquisitions amid the volatile debt market.

Other Stock to Consider

While we have a cautious stance on DaVita, other stocks in the medical sector worth considering are Addus HomeCare Corp. (ADUS - Snapshot Report) – Zacks Rank #1 (Strong Buy), HealthSouth Corp. (HLS - Snapshot Report) – Zacks Rank #2 (Buy), and LCA-Vision Inc. – Zacks Rank #2 (Buy).

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