EUR 850.00 For Business Accounts Only

Morningstar | Affirming Our Narrow-Moat Ratings for DaVita and Fresenius Medical Care; Raising FVEs. See Updated Analyst Note from 12 Sep 2018

After taking a fresh look at dialysis providers DaVita and Fresenius Medical Care, we are maintaining our narrow moat and stable trend ratings for both firms. We're modestly raising our fair value estimates for both companies as we account for the cash flows they've received year to date and tweak some of our underlying assumptions. For DaVita, our fair value estimate increases to $81 per share, from $77, implying approximately 17.4 and 8.3 times our earnings and EBITDA estimates for 2019. In Fresenius' case, we're bumping our fair value estimate for its local shares to EUR 81 per share, from EUR 80, and $48 per share, from $47, for its ADRs. This implies multiples closer to 16.5 and 9.2 times our updated 2019 earnings and EBITDA estimates, respectively.

While the dialysis industry has been the focus of much criticism over the last handful of years, we think both DaVita and Fresenius have carved out defensible economic moats that are likely to endure over the coming decade. Rooted in cost advantages derived from their unprecedented scale, we think these firms' industry dominance make it likely they will earn excess returns for shareholders over the long run.

While Fresenius looks fairly valued to us, we think 4-star DaVita currently presents an interesting opportunity for long-term investors. With approximately 20% upside to our fair value estimate, we think investors would be well rewarded for taking advantage of recent weakness that, in our view, largely represents an overreaction by the market. Sparked by the passage of legislation in California that effectively limits premium assistance activities in the state, we think the stock's subsequent tumble fully accounts for the risk to DaVita's operations should the bill be signed into law. DaVita's share price decline, combined with our view that full implementation of the law is 50/50 odds at best, suggests to us that investors would be well served picking up shares near current market valuations.