DaVita Raises Optimism for 2H11

Yesterday, DaVita Inc. (DVA - Analyst Report) announced the estimates for its third-quarter earnings and raised the operating income guidance for 2011.

The company expects its third-quarter operating income to be in the range of $314–322 million and earnings per share from continuing operations to be between $1.43 and $1.48, based on substantial volume growth and reduced operating costs. The estimates exclude special items.

Improved clinical practices and physicians’ reaction to the new FDA label for Epogen, a drug for increasing red blood cells in kidney patients, led to reduced utilization of physician-prescribed pharmaceuticals, thereby bringing down DaVita’s operating costs.

Additionally, management expects a 4.6% growth in normalized non-acquired treatment. However, the mix of treatments reimbursed by non-government payors, as a percentage of total treatments is expected to deteriorate again in the third quarter, after showing a slight improvement in the second quarter of 2011.

DaVita also revealed that the operating results of DSI Renal Inc. will be consolidated with the company’s earnings from September 1, 2011 onwards. The merger deal of approximately $690 million was announced on February 4, 2011and was completed on September 6, 2011.

The third quarter earnings estimates coupled with increased general and administrative expense forecast for the fourth quarter and an expected decline in rates from Veterans Administration, prompted DaVita to raise its full year earnings guidance.

For 2011, management increased its operating income guidance range to $1.125–1.155 billion from the previously announced estimate of $1.08–1.12 billion. The guidance excludes an after-tax non-cash goodwill impairment charge of $14.4 million or 14 cents per share recorded in the second quarter of 2011.

Moreover, DaVita affirmed its 2012 operating income guidance of $1.2–1.3 billion. The guidance is based on the expected changes in commercial and government rates and commercial mix, as well as the expected increase in investments, particularly for international expansion, and the uncertainty about physician-prescribed pharmaceutical expenses.

Further, the company announced the receipt of a subpoena for documents related to an investigation being carried out regarding inappropriate alliances with pharmaceutical companies and physicians.

The company will report its third-quarter earnings after the market closes on November 3, 2011.The Zacks Consensus Estimate for DaVita’s third-quarter earnings is currently at $1.29 per share, up about 12% year-over-year. Of the 14 firms covering the stock, 2 firms revised their estimates downward, while no upward revisions were witnessed in the last 30 days.

For 2011, DaVita’s earnings are expected to be about $4.81 per share, climbing about 10% year-over-year. The company’s rival HealthSouth Corporation (HLS - Snapshot Report) is expected to announce its third quarter earnings after the market closes on October 27, 2011.

Currently, DaVita caries a Zacks #2 Rank, implying a short term Buy rating.

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