Davita (DVA)

Interesting business and nice discussion by The Rational Walk on Ted W. pick and dialysis leader, Davita:

“…Net income was $978 million in 2021 while management’s calculation of free cash flow was $1,133 million. Free cash flow has exceeded net income at DaVita in recent years. Management has used free cash flow as well as proceeds from the DMG sale to retire more than half of its shares since the beginning of 2017 for a total of $7.6 billion.

As of mid-day on May 20, 2022, DaVita common stock was trading at ~$93.50 per share. There were 94.6 million shares outstanding as of April 29, 2022 giving the company a market capitalization of approximately $8.85 billion. The company had $844 million of shareholders equity and $8.87 billion of long-term debt on the balance sheet as of March 31. With $421 million of cash on the balance sheet, we can estimate DaVita’s enterprise value at ~$17.3 billion…”

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Rational walk doing a fantastic job, I’m a paid subscriber to his Substack.

Stock is cheap, they’re buying back a ton. $1B of annual buybacks. Eventually this will re-rate.

I think that Covid has hurt them due to missed treatments amongst their patients.

We have a Davita building in Spencer NC that I ride by often. Nice size building, I’m guessing 6 or 7 thousand square feet, and brand new with a huge parking lot that is very well done.

I have ridden by that building 50 times at all times during the week and day and I’ve never seen more than 5 cars parked there. Of course I’ve done absolutely no homework as to why this is the case so these comments are not yet worthy of much.

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A lot of dialysis patients have non emergency medical transport rides provided by insurance. I drive rideshare and have drive. Patient in past

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I read news a few years ago that there could be new portable dialysis equipment patients could use at home and no need to go to dialysis clinics, that’s when I sold DVA shares.

I had dug deep into DVA several years ago and got cold feet when I realized they were setting up nonprofits that would move patients off medicare/medicaid and pay for their private insurance to ultimate generate larger profits through dialysis. It all seemed convoluted and pretty slimy to me. I hope they’ve turned around whatever corporate culture was contributing to this.

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DVA provides an essential service and as people ages and drink ever more alcohol etc, its business to keep people alive is critical.
US govt can’t afford not to pay for it. Although they do charge high fees to private insurance, overall the business is running at a thin margin. The more private plans pay for it the less the government pay. So it’s a complicated relationship. I think it’s essentially a govt subsided utility. It exists because it’s currently the lowest cost of way of doing dialysis (compared to doing at hospitals or even at home due to the risk).

I bought at 50s but ultimately sold at 70s. The business has a lot of debt which I don’t like and I can’t sleep well if the position is too big.

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DVA is quite mis-understood due to all the negative stories about “screwing” private insurance companies (imo, the evil guys are the private insurance guys. They never want to pay their claims). So could be a good buy as they keep retiring shares…

But I worry their interest expenses will be much higher going forward given they need to refinance their debt at higher rate. Also labor expense is climbing, esp nurse pays. Even nanny is paid at 30/hr in NYC now.

DVA is quite mis-understood due to all the negative stories about …

The thing that keeps me away from the company is the astounding number of ways you could end that sentence.
OK–Perhaps no single thing is, by itself, unforgiveable.
But so, so many ways to finish the thought. They seem like a reputational catastrophe machine.

A random observation—
There is nothing wrong with some lobbying, but their expenditures are so high it seems questionable.
In recent years they’ve spent more than Chevron, Uber, and Facebook combined.
The dark interpretation is that their business is so intrinsically tied to regulatory quirks that they seem to be trying to purchasing the regulatory regime they want.
And in some ways succeeding. (prop 23)
By itself, not a reason to steer clear. With a half dozen other things leaving me a bit uneasy, in aggregate…yes.

The Sherman Act indictment, everyone found not guilty. Good for them.
The health insurance charity scam.
The new-bottle-for-every-customer reimbursement scandal.
Hundreds of millions paid in law suit settlements…repeatedly.
The ex boss who was, well, somewhere between eccentric and a nut case.

So no, maybe it doesn’t go in the too hard pile. Not the outright scam pile.
Maybe the too-strange-smelling pile?
Too bad they keep doing buybacks. We own more and more of this thing.

Jim

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