DaVita Earnings: Stellar Results Boost 2023 Outlook
Narrow-moat DaVita DVA turned in strong third-quarter results that exceeded expectations, and management increased its 2023 guidance for the third time this year. We are keeping our $104 fair value estimate intact, but recognize the firm’s strong trends on the top and bottom lines, which may be enhanced by management’s plans to resume its share repurchase program. We think repurchases would be a good use of capital considering recent trades well below intrinsic value and the firm’s leverage in the middle of its target range.
In the quarter, DaVita fared better than anticipated as external challenges eased and the firm controlled costs well. For example, COVID-19 mortality challenges appear to be dissipating in the dialysis market, as the pandemic turns into an endemic situation. With that easing, sales in the quarter grew 6% year over year, including about flat treatments and revenue per treatment up 3% in the U.S. DaVita’s cost controls really stood out in the quarter, as the company reduced both its patient care costs (on the switch to Mircera drug costs for anemia management and reduced labor pressures,) and general and administrative costs per treatment. In total, U.S. operating profit per treatment grew 29% year over year by our calculations, which looked strong in that mature market, and overall, DaVita’s adjusted EPS nearly doubled to $2.85 in the period, or well above FactSet consensus of $2.01.
On these stellar trends, DaVita increased its 2023 guidance again. Now, management expects a 22% increase in adjusted EPS at the midpoint of its new guidance range of $7.80-$8.30 (from $7.00 to $7.80 previously). Also, the company increased its free cash flow estimate to $950 million to $1.15 billion, up from $850 million to $1.1 billion previously. Overall, we appreciate that DaVita’s near-term challenges appear to be easing a bit after a tough pandemic period, but our fair value estimate has not changed materially, despite mild changes to our near-term expectations.
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