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Morningstar | Best Idea DaVita Reports Decent Preliminary 2Q Results, Dutch Auction Tender for Shares

On July 22, narrow-moat DaVita announced select metrics from its upcoming second-quarter release and boosted its operating income guidance for the full year. In addition, the firm announced its intent to tender $1.2 billion in stock through a Dutch auction process. We don't expect to adjust our $79 fair value estimate just yet, but we will reassess our outlook when the firm posts its full earnings release Aug. 1.

We applaud management's decision to aggressively buy back stock at a severely discounted valuation. The repurchase program will be completed at a price between $53.50 and $61.50, depending on how shareholders elect to tender, which at the high end of the range would account for nearly 12% of the firm's equity. These prices imply a valuation multiple of roughly 10-12 times our adjusted earnings forecast for 2020. Additionally, management announced that the company has already acquired an additional $350 million in stock at $55.78 per share since the first-quarter earnings call in May. With the addition of the tender, DaVita has the opportunity to retire approximately 15%-17% of the current outstanding share count this year at a valuation nearing our 5-star rating. This is an excellent use of the capital received from the sale of DaVita Medical Group, in our view.

Management boosted its annual operating income guidance to $1.64 billion-$1.70 billion, up nearly $80 million at the midpoint. This compares favorably with our current $1.64 billion estimate. The bulk of the upside was driven by better-than-expected availability of generic calcimimetic drugs year to date, which isn't expected to recur next year. However, nearly $20 million, by our math, is attributable to improved operating performance despite organic treatment growth that continues to fall short of expectations at 2.1%.