EUR 850.00 For Business Accounts Only

Morningstar | DVA Updated Forecasts and Estimates from 21 Aug 2018

DaVita posted second-quarter results within our expectations, and we plan to keep our fair value estimate and narrow moat rating in place for now. Despite the ongoing stable performance in DaVita’s dialysis operations--which included healthy 3.4% non-acquired treatment growth and an adjusted operating margin down slightly from last year at 14.5%--most investor eyes remain on the upcoming ballot initiative in California that could cap dialysis clinic profits in the state. We’re hesitant to handicap DaVita’s intrinsic value for now with limited exposure to California, unknown odds on the initiative’s likelihood to pass, and further uncertainty on the actual implementation of how allowable costs will be defined through the policy. Further, we estimate the operating profit impact would probably reach about 5% in an unfavorable outcome without offsetting initiatives. Based on an increased tax rate for year-end guidance on nondeductible advocacy costs, we estimate DaVita will spend near $70 million in the next few months to quash California’s ballot initiative along with similar proposals in other states like Ohio.

Outside of the ballot initiative issue, we think DaVita’s dialysis business can sustain stable results despite some of the commercial rate pressure seen this year and the ongoing shift in reimbursement for the calcimimetic Parsabiv. As a positive, the proposed 1.7% increase in the Medicare renal disease reimbursement rate in fiscal 2019 reflects a significant improvement over the flat rates witnessed during the last few years. Additionally, DaVita plans to outsource its pharmacy business following diminishing economics in this portion of the business. Management anticipates an operating loss for the prescription business over the back half of the year during the transition process to be mostly offset by a recovery in some revenue, primarily for bad debt, that occurred this quarter.