Critical Investments And Policy Changes Propel Healthcare Innovator Towards Brighter Financial Horizons

Key Takeaways

• DaVita's investments in technology and workforce initiatives aim to enhance revenue operations and patient care, contributing to future growth and profitability.
  
• Strategic responses to challenges and policy changes are expected to improve DaVita's operational efficiency and earnings, reflecting confidence in long-term success.
  
• Challenges such as elevated mortality rates, treatment volume growth reduction, and regulatory updates pose significant risks to revenue, earnings, and net margins.

Catalysts

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

• DaVita has made targeted investments in technology and staff to modernize and enhance revenue operations, leading to improved collection rates and efficiency in billing health plans. This operational enhancement is expected to sustain and increase revenue per treatment (RPT) into 2025, positively impacting revenue.
  
• The company's health plan negotiations have yielded modestly higher rate increases, primarily as a response to the higher inflationary environment in recent years. While not fully offsetting inflation costs, these higher rates contribute to revenue growth and potential margin improvements.
  
• DaVita's initiatives to address the nursing shortage, such as collaborating with nursing universities and creating internship programs, are aimed at stabilizing the operational workforce. This strategic focus on workforce stability can enhance patient care quality and safety, potentially reducing patient care costs and positively affecting net margins.
  
• The expected inclusion of oral-only drugs in the CMS bundle starting next year, supported by DaVita, is anticipated to provide broader access to these drugs for patients without Part D coverage. This policy change may lead to operational efficiencies and reduced drug costs, positively impacting earnings.
  
• DaVita is raising its 2024 adjusted operating income guidance due to the combination of increased expected operating performance and strategic responses to operational challenges such as center closures. This improved financial outlook, including better management of patient care costs, suggests confidence in future growth and profitability, reflecting positively on earnings and net margins.

Assumptions

• Analysts are assuming DaVita's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.9% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $846.9 million (and earnings per share of $11.9) by about August 2027, down from $859.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $956 million in earnings, and the most bearish expecting $705 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2027 earnings, down from 14.7x today. This future PE is lower than the current PE for the US Healthcare industry at 26.4x.
• Analysts expect the number of shares outstanding to decline by 8.08% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.64%, as per the Simply Wall St company report.

Risks

• Elevated mortality rates above forecasts could potentially reduce patient census, adversely affecting treatment volumes and revenue.
  
• Center closure costs, although decreasing in future estimates, have a current financial impact and reflect ongoing operational adjustments which could influence net margins negatively.
  
• Treatment volume growth projections lowered to 0.5-1%, impacted by missed treatments due to severe weather events and weaker-than-expected U.S. net census gains, possibly reducing revenue and earnings.
  
• The reliance on continued strength in revenue per treatment (RPT) growth, driven by improvements in collection capabilities and negotiation with health plans, poses a risk if these improvements cannot be sustained or further increased, potentially limiting future earnings growth.
  
• Regulatory changes and updates from CMS, including the inclusion of oral-only drugs within the bundle, pose operational and financial implementation risks, potentially affecting net margins and operational costs.

Valuation

• The analysts have a consensus price target of $148.44 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 $175.0, and the most bearish reporting a price target of just $123.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $14.1 billion, earnings will come to $846.9 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $150.6, the analyst's price target of $148.44 is 1.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.