DaVita Inc. is a provider of kidney dialysis services, both in outpatient centers and as inpatient services in hospitals. Revenue was up 16% in the second quarter compared to the same period in 2011, and increased at a similar rate in the first quarter of the year (sales increased 3% on a q/q basis). Operating expenses were also higher, and a legal proceeding contingency caused operating income (as well as net income) to be about flat. Without that contingency, the second quarter would have shown about the same increase in operating income that the company saw in the first quarter. Including it, earnings per share for the first half of 2012 rose to $2.46 compared to $1.99 a year earlier. Therefore, it appears that DaVita’s operations are doing quite well.
DaVita’s trailing P/E is 20, but that’s likely skewed up a point or two by the contingency which reduced the company’s earnings in the second quarter. Annualizing the first quarter’s $1.47 in earnings generates a P/E of 19, and note that revenue- though not necessarily operating income ex-contingency- was higher in the second quarter. The company trades at 16 times forward earnings estimates.
Buffett isn’t the only notable investor who likes DaVita Inc.- Tiger Cubs have started to sniff around as well. According to our database of 13F filings, Andreas Halvorsen’s Viking Global more than doubled its own position in the stock during the second quarter and closed June with a total of 3.2 million shares (find more stocks that Viking Global owned). Fellow Tiger Cub Stephen Mandel, who manages Lone Pine Capital, initiated a position of 3 million shares at his own fund (see more stock picks from Stephen Mandel and Lone Pine Capital).
DaVita’s peers include other specialized health care services providers such as Mednax Inc. (NYSE:MD), which provides neonatal care; HEALTHSOUTH Corp. (NYSE:HLS), which rehabilitates patients suffering from strokes or neurological problems; Acadia Healthcare Company Inc (NASDAQ:ACHC), which operates behavioral health centers; and orthotic and prosthetic care company Hanger Inc (NYSE:HGR). DaVita is generally priced at a premium to these peers, with Acadia being the exception: that company is unprofitable on a trailing basis, and trades at 24 times analyst consensus for 2013. It has been seeing very strong growth recently- up 61% in its most recent quarter compared to the same period in the previous year- and if it can continue that growth and deliver positive earnings than its valuation may make sense.
The other three peers all trade at forward P/E multiples in the 13-14 range, which as we’ve mentioned is something of a discount. They also showed considerable earnings growth in the second quarter versus the same period in 2011, with HealthSouth doubling its net income, and grew revenues modestly as well (though at lower rates than DaVita did). On an absolute basis, a P/E in that range given recent growth is quite attractive, but the same is the case for DaVita.
There’s little apparent difference in the value opportunity in these companies relative to each other, as the peers with lower growth rates seem to carry an appropriately lower multiple on their earnings. Therefore, an investor should pick whichever healthcare specialty they believe has the best prospects.
