Risk-Reward Balanced at DaVita - Analyst Blog

On April 10, 2014, we issued an updated research report on DaVita Healthcare Partners Inc. DVA. The company boasts rapid expansion in international presence as well as active domestic acquisitions that bode well for long-term growth. However, high debt levels and an anticipated weak Health Care Partners' HCP segment are matters of concern.

Acquiring dialysis centers and businesses that own and operate dialysis centers, as well as other ancillary services and strategic initiatives have been DaVita's preferred business strategy over the past several years. The company also saw an increase in outpatient dialysis centers. These acquisitions along with strategic alliances are helping DaVita to slowly expand in the international markets. In the past couple of years, the company strengthened its position in the emerging and developing markets of Columbia, Portugal, Malaysia, Taiwan, Saudi Arabia, China, India and Germany. Moreover, the mergers with Fresenius Medical Care FMC and Arizona Integrated Physicians (AIP) in 2013 have increased patient volume and are contributing to growth.

Further, DaVita has been generating strong operating cash flow accruing from improved earnings, robust cash collections and the timely payments for working capital expenditures. The strong cash flow funds DaVita's capital expenditure needs and acquisitions.

This Zacks Rank #3 (Hold) healthcare services company also delivered positive surprises in three of the last four quarters, with an average beat of 1.35%.

However, on the tepid side, rising unemployment levels is a concern for DaVita. Rising unemployment may result in shifting of people from commercial insurance schemes to government schemes due to wide disparity in payment rates. The company's primary generators of profit are payments received from commercial payors. Thus, the shift in payor mix will be harmful considering the Medicare Advantage reimbursement rate cuts for 2014 announced by the Centers for Medicare and Medicaid Services in Apr 2013.

Also, the company's debt refinancing continues to keep DaVita's financial leverage at elevated levels. Issuance of debts time and again and entering into the interest rate swap and cap agreements have also increased interest expenses significantly. The company's expenses are significantly high and rising levels of interest expenses are likely to aggravate the expense issue. In fact, high financial leverage limits the company's capability to capitalize on business opportunities or engage in capital deployments. Also, the establishment of health insurance exchanges is reducing the number of policyholders opting for commercial insurance and thus could adversely affect the earnings and cash flow of DaVita.

Other Stocks to Consider

Aetna Inc. AET, Chemed Corp. CHE and MEDNAX Inc. MD are some better-ranked stocks in the healthcare services space. While Chemed sports a Zacks Rank #1 (Strong Buy), Aetna and MEDNAX carry a Zacks Rank #2 (Buy).