Hebe Yang, Ritika Kohari, Samuel Sutanto, Tsien White

City University of Seattle

Investment Analysis

Overview

Incorporated in April 1994 and based in Denver, DaVita Healthcare Partners, Inc. is a publicly-traded Fortune 500 company (NYSE:DVA)

Second largest provider of dialysis services in the US with 34% of the market, serving approximately 170,000 patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD) at 2,152 outpatient dialysis centers.

The company also operated 87 outpatient dialysis centers located in 10 countries outside the United States.

Overview

Warren Buffett's Berkshire Hathaway Inc. owns 38.56 million shares (about 18 percent) of DaVita stock.

DaVita was named the most innovative company on FORTUNE® Magazine's World's Most Admired Companies' 2014 ranking of health care facilities.

Kent J. Thiry, Co-Chairman and CEO of DaVita HealthCare Partners Inc was named 37th Best Performing CEOs by Harvard Business Review.

Lines of Business

U.S. dialysis and related lab services business,

Healthcare Partners (HCP)

Other ancillary services and strategic initiatives, which includes international dialysis operations.

Market Signal

DaVita merged with HealthCare Partners Inc. in 2012, one of the largest operators of medical groups and physician networks.

DaVita paid $4.42 billion in cash and stock to merger with Healthcare Partners.

Market Signal

In 2012, Berkshire Hathaway Increased State in DaVita Healthcare Partners, Inc.

In 2013, DaVita acquired 5 Portugal-based and 4 Poland-based dialysis Centers

In 2014: DaVita had to $389 Million to Settle Federal

Charges of Illegal KickbacksBerkshire Hathaway now holds 17.56% stake.DaVita HealthCare Partners acquires Colorado Springs

Health Partners

Strong Financial Performance

Competitors

Germany-based Fresenius Medical Care (NYSE:FMS) is their largest competitor, owning 37% of the market.

Fresenius manufactures a full line of dialysis supplies and equipment in addition to owning and operating dialysis centers.

Hospitals or non-profit organizations.

Global Citizenship

At DaVita Kidney Care, they believe that if they create a thriving, sustainable community for their teammates, they in turn will create a special clinical and caring community for their patients and their families, and inspired to help others.

Caring for their patients, caring for each other, caring for our world

Corporate Social Responsibility

Kidney Care in India, Saudi Arabia, Malaysia, Germany.

DaVita Village Trust Surgical Mission in Jamaica.

DaVita HealthCare Partners Gives $1.5 Million to Nonprofits Across the U.S.

Sustainable Development

Vision: To build the greatest healthcare community the world has ever seen

Mission: To be the provider, partner and employer of choice

Continuous clinical improvement since 2000

9,700 teammates trained in DaVita University professional-development classes in 2013.

DaVita’s 2015 Environmental Goals

Reduce energy consumption by 15% per treatment

Reduce water consumption by 14% per treatment

Reduce office paper consumption by 20%

Awards

Fortune’s World Most Admired Companies 2014: #1 among health care medical facilities and in innovation

Harvard Business Review Reputation Institute Award: 37th place

100 Best Performing CEOs: Kent Hinry placed 37th

100 Most influential people in Health Care: Kent Hinry placed 10th place.

2013 Communitas Awards Excellence Winner

Health Ethics Trust: Best Practice Award

Opportunity

Dominate the dialysis business

Expand Domestically and Internationally

Comprehensive portfolio

Investor confident with the company

Growth through Acquisition

Adding more domestic dialysis centers

Expanding internationally

HCP

Challenges

Lack of vertical growth

Potential dependency on limited supplier

Higher level of indebtedness

Debt-to-Equity Ratio: 2.64

Future Risks

Increased Operating Costs

Reduction in Medicare Advantage Plan

Reduction in commercial payors due to unemployment will reduce significant profit

Possibility of losing share among private insurers due to the company’s refusal to accept reimbursement cutbacks

International Expansion requires significant investments

Profit Risks

DaVita makes all of its profits from privately insured patients, which make up just 10 percent of DaVita's kidney-care customers.

The other 90% comes from Medicare/Medicaid, and it reimburses at an unprofitable rate for DaVita and most health-care companies. They provide zero percent of profits.

Losing a modest portion of those private payers could cut into the company's earnings.

Key Objectives. Biggest Threat.

Keeping people off dialysis in the first place

Emerging Technology: Artifical kidney using stem cells and nanotechnology

Better solutions for dialysis due to great risk and great cost

Analyst Rating

The Street Rating: A (Buy)

Zacks Investment Research: Rank #3 (Hold)

Keybanc: Hold

Deutsche Bank: Hold

Raymond James: Market Perform (Hold)

Jefferies: Buy

Citigroup: Neutral (Hold)

Analyst Rating

Six equities research analysts have rated the stock with a hold rating and five have issued a buy rating to the stock.

The company presently has an average rating of “Hold” and an average price target of $75.30.

Our recommendation

In 2013, Health-care (S5HLTH) stocks are leading gains in U.S. equities this year for the first time since 1998 as companies cut costs and investors speculate an expansion of insurance programs.

After three quarters into 2014, health care stocks continue to be some of the best performing stocks in the markets, as they have been top performers over the past several years.

Health Care

Our recommendation

Despite the concern of government cutting Medicare Advantage Plan, they will not drive down the health care industry to the ground.

Strong lobbying against the cuts from insurers.

In 2014, Medicare has reversed proposed payment cuts to private heath plans in the popular Medicare Advantage program for the second straight year amid strong pushback from health insurers and Capitol Hill.

Our recommendation

Although dropping on Return on Capital to 4.4%, DaVita maintains predictable growth and shareholder-friendly management.

P/E ratio of 24, Forward-looking P/E of 19, Five-year average P/E is 18, which is fine but not overvalued.

Significant debt obligations impact the company's growth and development plans.

Our recommendation

DaVita provided 6.3% more dialysis treatments per day in the fourth quarter than a year ago, leading to total net revenue of $3.06 billion, up from $2.47 billion last year.

Sales from HealthCare Partners climbed 3.2% sequentially to $829 million in the fourth quarter, and that segment's operating income totaled $98 million.

Our recommendation

Despite of the high risk and great cost, dialysis is still the preferred method for many years to come.

Baby boomers are driving demand for primary and specialty care, which supports demand for DaVita's HealthCare Partners segment.

Our recommendation

Kent Thiry, CEO of DaVita HealthCare Partners Inc., will step in temporarily to run HCP, hoping to reverse a “difficult 18 months”.

Kent Thiry is known for his bluntness regarding challenges to the company, and several analysts pointed out during Thursday's earnings call that he has overestimated potential headwinds several times in recent years and then outperformed expectations.

Buy gradually.Add to watchlist.

Wait for a pullback.