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DaVita (New York Stock Exchange: DVA) is one of the most prominent kidney dialysis companies in the United States. They went public in his 1995. Their main competitor is Fresenius, which also has a sizeable market share.In the US, they serve most networks 3,000 outpatient dialysis centers. Additionally, there are more than 300 of his centers in 10 countries outside the United States.
BRK.A is DVA’s largest shareholder with 40.1% ownership (largest in BRK’s stock portfolio). Despite the size of the stake, DVA remains a passive investment for BRK. They don’t have anyone on the board and they won’t make any changes.
One of Berkshire’s two investment heads, Ted Weschler was a longtime DVA shareholder before joining BRK and still personally owns about 1% of the company. It has been a position in BRK’s portfolio since 2011. Although not officially confirmed, it is assumed that he was responsible for this purchase.
This was Buffett’s own choice of stock, but it has many of the hallmarks of Buffett-style investing. Stable and predictable earnings, continuously growing EPS, large market share, and lack of meaningful competition indicate that the moat is perpetual.
Below are indicators of return on equity.
|
Company |
Revenue 10-year CAGR |
10-year median ROE |
10-year median ROIC |
EPS 10-year CAGR |
FCF/equity 10-year CAGR |
|
2 |
5.6% |
13.9% |
4.9% |
13.6% |
15.3% |
|
FMS |
4.5% |
10.9% |
5.7% |
0.5% |
1.3% |
|
HCA |
7.1% |
-30.9% |
9.3% |
15.6% |
10.5% |
sauce
The kidney dialysis industry is projected to grow at a rate of 5.73% till 2029. Despite the challenges posed by the pandemic, DVA’s revenue is still growing slowly and EPS is increasing every year.
capital allocation
Dividends have only been paid three times. Acquisitions have been a consistent growth driver over the long term and have acquired nearly 30 companies. Share numbers began to decline significantly from 2015 and are now 54% below that point. Let’s see below how the capital was allocated. All numbers are in millions.
|
Year |
year 2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
|
FCFMore |
551 |
1,156 |
817 |
849 |
1,134 |
1,002 |
785 |
1,306 |
1,304 |
1,289 |
|
repurchase |
0 |
0 |
0 |
550 |
1,098 |
803 |
1,162 |
2,384 |
1,459 |
1,599 |
|
Acquisition |
4,296 |
314 |
307 |
114 |
550 |
809 |
202 |
110 |
204 |
201 |
|
investment purchase |
11 |
13 |
481 |
1,719 |
1,147 |
244 |
14 |
107 |
154 |
34 |
|
Debt repayment |
39,286 |
66,724 |
60,046 |
53,922 |
52,116 |
50,837 |
59,240 |
40,606 |
4,110 |
861 |
Long-term debt is now $11.42 billion. Management said on the third-quarter conference call that debt/EBITDA is higher than desired and debt repayment is prioritized over repurchases. You can see that we have been aggressively deleveraging for most of the last decade. With FCF this powerful, there’s no reason to think this won’t happen again.
dangerous
The fact that DVA is in a duopoly with FMS removes a lot of risk from the table. This is not a sector where domineering newcomers can aggressively grab market share. Both DVA and FMS have consolidated many clinics and will continue to do so where possible.
DVA has long held a large market share and is still growing at 37% today. I think the biggest risk is a combination of losing market share over time and excessive leverage. I think both of these things are unlikely to occur. So the real risk for long-term investors comes from overpaying.
evaluation
With the stock down 43% from its peak in 2021, it was not immune to the fall that affected many.
Below are multiple comps between peers.
|
Company |
EV/Sales |
EV/EBITDA |
EV/FCF |
P/B |
installment yield |
|
2 |
1.3 |
7 |
13.2 |
3.3 |
none |
|
FMS |
0.8 |
4.7 |
10.3 |
0.6 |
4.5% |
|
HCA |
1.8 |
8.8 |
25.2 |
-88.2 |
0.9% |
sauce
Below is the dcf model.
money chimp
Partly because I expect buybacks to increase again after the deleveraging period has passed, I gave a fairly optimistic earnings growth estimate. The company is inherently undervalued and now is an ideal time for long-term investors to start a position.
Conclusion
DVA has been owned by BRK since 2011 and may be held for the long term. Despite the challenges posed by the pandemic, the company and industry are fairly stable and predictable. Debt levels are high, but the company has shown a willingness to pay down debt aggressively in the past and will continue to do so. The bolt-on acquisition will continue with a buyback as further debt is repaid. Now is a good time to essentially buy stocks.