EUR 850.00 For Business Accounts Only

Morningstar | Underlying Trends Remain Strong in DaVita's 3Q Results; Prop 8 Failure a Win For the Industry

Narrow-moat DaVita reported third-quarter results that tracked our forecasts for the firm. Specifically, the U.S. dialysis business was in line with our view, but the international and ancillary services segment came in slightly weaker than anticipated. As we update our model, we don't expect to make any changes to our $81 per share fair value estimate, which implies 17.4 and 8.3 times our 2019 adjusted EPS and EBITDA forecasts, respectively.

Perhaps the most important event of the day was California voters' rejection of Proposition 8 by a fairly wide margin--a little over 60% of votes were on the "no" side of the ballot. We hadn't baked any potential impact of Prop 8 into our valuation for DaVita given our opinion on the likelihood of its passing, but shares rallied nearly 10% on the day as a result.

Turning to the quarter's performance, we think it could be somewhat disappointing at first blush, but actually quite strong under the surface. Management reduced its outlook for full-year operating income by nearly $40 million, but this is driven by a few discrete items including the yearlong opposition to Prop 8 and $23 million in one-time stock compensation associated with changes to the firm's retirement policy. Backing out management's full-year estimate of $95 million in total advocacy costs and the additional stock compensation, adjusted operating income would fall well ahead of the $1.5 billion to $1.6 billion range management provided at the outset of the year.

We think the underlying performance in U.S. dialysis continues to do well, with revenue per treatment in line with our expectations and same-facility volume growth clocking in at 3.3%. While somewhat below the firm's recent trend, this is in line with our long-term forecast 3%-4% patient growth nationwide. Internationally, a decline in clinic count drove the bulk of the shortfall versus our forecast, but we think this is simply a timing issue and expect ongoing investment in this area over time.

For a deeper dive into the dialysis industry and company valuations, please see our report titled "Dialysis Remains Moatworthy Despite Regulatory Concerns."