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Bear of the Day

I last wrote about DaVita HealthCare Partners (DVA - Free Report) as the Bear of the Day in mid-August when shares were trading above $68.

I wanted to revisit this story now because while we don't have any upward EPS estimate revisions to get the stock out of the Zacks Rank cellar, we did get a ratings upgrade from a respected firm that may soon mark the beginning of a turnaround for this important business.

Before I share details of that upgrade news, let's recap what has happened. DVA became a Zacks #4 Rank Sell in mid-July as analysts began lowering estimates before the company's Q2 report.

On August 8 the company delivered a 3% EPS beat but disappointed with lowered guidance for the year due to difficulties with a recent acquisition.

Since the earnings report, shares tumbled 13% up to August 16, the date of my first article, as most analysts have moved their estimates down again. Then from August 17 on, DVA dropped further but found support near $63, just above the 52-week lows of February at $61.36.

The Business of Dialysis

DaVita HealthCare Partners is the second-largest US provider of dialysis services to patients with chronic kidney failure and end stage renal disease. They serve roughly 180,000 patients through a network of 2,179 owned and managed dialysis facilities.

The company offers outpatient, home-based, and hospital inpatient hemodialysis services, ESRD laboratory services and provides management and administrative services to outpatient dialysis centers.

DaVita had revenues of $13.78 billion in 2015 and trailing 12-month (TTM) sales are at $14.36 billion as of June 30. DaVita HealthCare Partners Inc., formerly known as DaVita Inc., is headquartered in Denver, Colorado. With the acquisition of HealthCare Partners (HCP), the company became the largest operator of medical groups and physician networks in the US.

The Quarter Analysts Saw Coming... Mostly

Total revenue increased 8.8% year over year to approximately $3.72 billion and narrowly surpassed the Zacks Consensus Estimate by 1.2%. The year-over-year improvement was mainly attributable to a rise in patient service revenues.

Analysts knew that the HealthCare Partners acquisition was not going according to management's plans. That's why they were lowering estimates in July. But they weren't expecting a $70 million drop in segment guidance.

Here's how analysts at Raymond James broke down the news...

Drivers behind HCP’s lowered 2016 guidance include: 1) fee for service revenue growth of 3% vs. management 6% target, 2) an overestimation of Medicare Advantage reconciliation payments; 3) Medicare Advantage mentorship growth lower than expected and; 4) an acceleration in the re-branding of HCP to the DaVita Medical Group - $5/$10 million more than expected.

And here was the fallout for EPS estimates...

In the last 30 days, the 2016 full-year consensus fell from $3.95 to $3.77, representing negative annual growth of -1.7%.

2017 consensus profit projections dropped from $4.42 to $4.18, for 11% growth if all goes well.

The Upgrade from RJ

On September 20, analysts at Raymond James talked again about concerns in the market over DaVita's exposure to the ACA exchanges, noting that as the dust settled the risks appeared to be lower than they initially estimated in August.

And finding shares attractively valued after the sell-off, they felt compelled to move their rating on DVA shares from Market Perform to Outperform. They also issued a new $75 price target.

DaVita is a strong business and clear leader in its industry. But until the estimates picture turns around, it's probably best to stay on the sidelines. If the move by this investment bank becomes a new trend, and estimates head back up, then the turnaround could be in motion.

The Zacks Rank warned you in July before the drop and it will let you know when it's safe again.

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