Bernstein Lowers DaVita's Price Target, Believes Dialysis Biz Is Well Positioned For Long-Term Growth

Bernstein’s Lisa Bedell Clive maintained a Market-Perform rating for DaVita HealthCare Partners Inc DVA, while reducing the price target from $74.50 to $71.

DaVita reported its Q415 EPS 4 percent ahead of expectations. The company’s net income was in-line with the estimate, while total operating income missed expectations by 2 percent. DaVita’s results were impacted by a $206m impairment charge on HCP and a $23m accrual for damages and liabilities associated with the DaVita Rx pharmacy business.

Despite low organic growth, the Kidney Care segment delivered a strong performance in the quarter. HCP delivered a weak performance, with normalized operating income at $37m, significant below the consensus estimate of $42m.

DaVita provided its 2016 guidance short of consensus expectations. “Guidance for HCP was particularly weak, as improving operations will be offset by rate cuts and planned investments,” analyst Lisa Bedell Clive wrote.

Management indicated rate cuts of an estimated $58m on account of the new acuity coding RAF model. Moreover, the company intends to invest about $60m in the business in 2016, in order to address previous underinvestment as well as to build up HCP's competitive advantage over time.

The EPS estimates for 2016 and 2017 have been reduced from $4.10 to $3.94 and from $4.79 to $4.51, respectively, to reflect the weaker operating income guidance.

While Clive believes that DaVita's dialysis business is “well positioned for growth in the long-term,” she expressed concern regarding HCP’s prospects “given a very competitive environment for M&A deals that we think will make the pace of expansion challenging.”