We maintain our Neutral recommendation on DaVita HealthCare Partners Inc. (DVA - Free Report) as we expect headwinds like increasing expenses and high dependence on commercial payors and government reimbursements to slightly weigh on strong revenues and financial strength. This healthcare service provider currently carries a Zacks Rank #3 (Hold).
Why the Reiteration?
DaVita has been acquiring dialysis centers and businesses that own and operate dialysis centers, to increase client base as well as enhance services. We also remain optimistic about the service agreement with Fresenius Medical Care, announced in Jan 2013, which when implemented should boost earnings of DaVita’s ancillary services and the strategic initiatives segment, which covers its pharmacy services. This will also fulfill Congress’ requirement of all oral end-stage renal disease medications to be incorporated the bundled payment model by 2016 thereby fetching more revenues going forward.
In terms of geographic expansion, last year DaVita entered into a merger agreement with the West-Valley-based organization, Arizona Integrated Physicians (AIP) to strengthen its Arizonian operations. This contributed positively and resulted in increased patient volume and market growth in the third quarter of 2013. DaVita also seeks to expand its presence in Europe and has been seeking acquisition and partnership opportunities in all major European and Asian countries.
On the tepid side, operating income for HealthCare Partners, the wholly owned subsidiary of DaVita, is expected to decline significantly in 2014 owing to the Medicare Advantage reimbursement rate cuts for 2014 announced by the Centers for Medicare and Medicaid Services in Apr 2013.
Almost 87% of DaVita’s patients use Medicare or Medicaid programs. An inadequacy of government reimbursements will substantially affect profitability and could impel it to close numerous centers, pressurizing the company. Moreover, high debt burden raises concern regarding the financial position of the company. Also, with the establishment of health insurance exchanges, as per the healthcare reform, the number of policyholders opting for commercial insurance is projected to decline, posing concern for DaVita.
Nevertheless, DaVita’s strong operating cash flow is impressive and should support its working capital requirements. Moreover, during the last reported quarter, the company went in for a 2:1 stock split that has made the stock affordable and increased demand. Also, the inorganic growth prospect of the company is robust and should enhance revenues going ahead.
With respect to earnings performance, DaVita delivered positive earnings surprise in three out of the last four quarters with an average beat of 2.7%. In the last reported quarter, operating earnings of 98 cents per share surpassed the Zacks Consensus Estimate by 2.1% and year-ago earnings by 28.9 %.
Other Stocks to Consider
Some better-ranked stocks in the healthcare space include Addus HomeCare Corporation (ADUS - Free Report) , VCA Antech Inc. and LCA-Vision Inc. . All three stocks carry a Zacks Rank #2 (Buy).