Kidney Smart And IKC Programs Will Deliver Holistic Kidney Care In Partnership With CMS

Key Takeaways

• DaVita's expansion into comprehensive kidney care and international markets is strategically positioning the company for future revenue and earnings growth.
  
• Focus on enhancing collection performance and share repurchase strategy aims to improve net margins and achieve strong earnings per share growth.
  
• Weather disruptions and supply chain issues threaten revenue and income, while international challenges and G&A costs pose additional financial risks.

Catalysts

Provides kidney dialysis services for patients suffering from chronic kidney failure in the United States.

• DaVita's expansion into comprehensive kidney care, including the Kidney Smart program and Integrated Kidney Care (IKC), positions it to drive future revenue growth by providing holistic patient care in partnership with health plans and CMS, addressing rising healthcare costs.
  
• The transition of oral phosphate binders to the dialysis benefit, effective January 2025, is anticipated to contribute to revenue per treatment growth due to expanded access for patients, potentially impacting operating income positively within the range of $0 to $50 million.
  
• The company is focusing on enhancing collection performance and contracting, which is driving higher revenue per treatment growth and offsetting slower treatment volume growth, thus potentially improving net margins.
  
• DaVita's international expansion, including acquisitions in Latin America like Brazil, is expected to contribute approximately $50 million in adjusted operating income growth year-over-year, supporting earnings enhancement.
  
• Share repurchases are part of DaVita's capital allocation strategy, aiming to achieve double-digit earnings per share growth, driven by operating income growth and share count reduction.

DaVita Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DaVita's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.3% today to 5.8% in 3 years time.
• Analysts expect earnings to reach $843.5 million (and earnings per share of $12.06) by about April 2028, down from $936.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, up from 12.1x today. This future PE is lower than the current PE for the US Healthcare industry at 23.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.17%, as per the Simply Wall St company report.

DaVita Future Earnings Per Share Growth

Risks

• The impact of severe weather events and supply chain disruptions, such as Hurricane Helene, negatively affecting volume growth and patient admissions, could lead to lower revenues and operating income.
  
• The uncertainty in treatment volume growth, with expectations for a flat year in 2025 due to factors such as lost admissions and disruptions in peritoneal dialysis (PD) supply, poses a risk to revenue growth.
  
• The integration of oral phosphate binders into the dialysis bundle introduces variability in cost forecasts, potentially impacting patient care costs and operating margins if these costs escalate beyond expectations.
  
• International operations faced challenges such as a $19 million reserve against aging accounts receivable in Brazil, which affects international operating income and hints at potential financial risks in emerging markets.
  
• The company experienced higher G&A costs due to investments and seasonal factors, which if not managed properly, could squeeze net margins over time if revenue growth does not offset these expenses.

Valuation

• The analysts have a consensus price target of $164.568 for DaVita based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $186.0, and the most bearish reporting a price target of just $145.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.5 billion, earnings will come to $843.5 million, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 7.2%.
• Given the current share price of $141.5, the analyst price target of $164.57 is 14.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.