Author Topic: DVA – DaVita HealthCare Partners  (Read 216103 times)

ander

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Re: DVA – DaVita HealthCare Partners
« Reply #550 on: November 16, 2018, 07:35:47 AM »
I saw UBS initiated with a Sell rating. I don't have access to the note. Anyone know if any incremental fundamental insights in the note?


ander

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Re: DVA – DaVita HealthCare Partners
« Reply #551 on: November 16, 2018, 07:42:53 AM »
Actually got the note. Some excerpts.

DVA's stock has underperformed for 3-4 years while cloaked in a cloud of controversy.
Poor execution (DMG), California risks, payer/federal policy oversight, investigations and
now perceived interloper risks all color a complicated backdrop. DVA carries elevated
tail-risks into 2019 that potentially compromise earnings, sentiment, and the valuation.
We see exogenous factors limiting upside in the multiple (labor union and UNH/CVS
strategies) and heightened risk from payer mix and underwhelming organic growth not
priced into the outer-years threatening downward revisions to earnings. Sell.

Heightened attention on payer mix and pricing
US Renal Dialysis System (USRDS) data indicates pre-65 incidence rates (proxy for
commercial population) has declined for two years. 1Q18 rates decelerated 3% y/y
(steepest ever). If this trend continues, it raises the specter of long-term headwinds to
mix and margin compression.

Tail-risk remains elevated into 2019
The cons outweigh the pros (valuation). Probability of labor union (SEIU) success in
California grows in 2019 as Governor Newsom is pro-union (returned campaign
contributions to dialysis organizations). Our 2021e EPS contemplates a $140m OI cut
(minimum staffing bill). Perceived 'interloper' risks grow as CVS/UNH discuss emerging
dialysis strategies. Closing DMG is the only NT catalyst we see and well-known
buybacks are likely discounted. Industry in-fighting on the PATIENTS Act makes
underwriting long-term growth via integrated care difficult. Industry backdrop is tough.

Valuation: Our DCF-derived PT of $64 implies 11.9x 2020E EPS

ander

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Re: DVA – DaVita HealthCare Partners
« Reply #552 on: November 27, 2018, 08:56:32 AM »
Note the 8-k from yesterday after the close, but dated from last week (at least I only saw it on the wires yesterday). Increases debt covenants for deal closing. Maybe implies they’re buying back more shares recently and currently.

http://investors.davita.com/static-/785e52fe-a376-41c1-99ca-6056ad0fafb0

flesh

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Re: DVA – DaVita HealthCare Partners
« Reply #553 on: November 27, 2018, 02:16:56 PM »
What I find interesting about dva is from a p equity perspective of steady state cash flow. There's a huge divergence between maintenance and growth capex here, perhaps 400m, likely even less M capex ex ROW, which you could sell. Importantly, you could actually not grow this company and soak up all that cash without hurting the business in the usa. Most companies don't have such a divergence and when they do it's not very clear exactly what's required for true maintenance considering all the extraneous factors/moat, etc. For a cherry on top, you can lever it to the sky. You can maintain the vast majority of those cash flows in recessions to add to whatever else your doing.
« Last Edit: November 27, 2018, 02:40:36 PM by flesh »

vince

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Re: DVA – DaVita HealthCare Partners
« Reply #554 on: November 27, 2018, 05:42:43 PM »
What I find interesting about dva is from a p equity perspective of steady state cash flow. There's a huge divergence between maintenance and growth capex here, perhaps 400m, likely even less M capex ex ROW, which you could sell. Importantly, you could actually not grow this company and soak up all that cash without hurting the business in the usa. Most companies don't have such a divergence and when they do it's not very clear exactly what's required for true maintenance considering all the extraneous factors/moat, etc. For a cherry on top, you can lever it to the sky. You can maintain the vast majority of those cash flows in recessions to add to whatever else your doing.

Flesh, mgmt is guiding to increased levels of capex for the foreseeable future which makes those expenditures maintenance almost by definition. And I dont see a step up in growth rates.  Unless you are privy to information that I havent come across then I wouldnt be so confident that you can categorize the increased levels as growth.  Maybe you can explain how you have determined 400 million of capex as growth?   

kab60

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Re: DVA – DaVita HealthCare Partners
« Reply #555 on: November 28, 2018, 02:02:13 AM »
That's actually a big part of why I've stayed on the sidelines; the capex is high and there's not much growth to show for it. (and then there's the regulatory risks that I can't handicap but I pretty much stop after looking at the cash flows). What's your take on FCF atm flesh and expected growth in those if you don't mind?

flesh

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Re: DVA – DaVita HealthCare Partners
« Reply #556 on: November 28, 2018, 09:36:11 AM »
That's actually a big part of why I've stayed on the sidelines; the capex is high and there's not much growth to show for it. (and then there's the regulatory risks that I can't handicap but I pretty much stop after looking at the cash flows). What's your take on FCF atm flesh and expected growth in those if you don't mind?

Hey buddy, nothing much different to say than whats been said.

Using current capex and operating cash flow of 1.5-1.6b minus 5b in cash ex dmg plus the higher leverage ratio of recent note going towards buybacks you get somewhat cheap. I assume it will grow earnings a few % a year before bb's. I'm assuming around 2-3 b will go towards debt immediately, per the recent note and extra 1b taken out earlier this year for bb's. The reduced shares and debt interest will raise earnings a fair amount ceteris paribus. DMG is adding virtually no gaap eps. It's mostly been negative in any given cy since the time of purchase. Some of the eps gain has been masked by the extra debt, that's about to change, more bb's and less debt together at a lower ev.

Where I probably diverge from some is that I do believe the intrinsic value can largely be attributed to steady state fcf with this name per last post. To get a sense for what capex needs to be you can look at dva pre dmg or healthcare partners, for perhaps a few years or more as a % of sales, ebitda, etc. Fine tune it by considering how large intl was then vs now. Has anything really changed in terms of what capex dva usa should require since then? Should it be more than double or perhaps 25% more?

Moreover, I'm trading risks here. DVA's risks are known and quantified largely, what about the market/economy? We are at the top of a cycle, what's my downside? Pick your multiple and apply 2-3 b plus fcf to buybacks over the next 2-3 years regardless of what happens in the economy. If dva's price does correlate with the market's in a downturn, that's fine. IIRC, dva was down 23% in the great recession vs 54%ish. In the mean time, I can trim and add as needed. This has been a 10-30% position for me for 1.5 years. Right now it's 25%.

Buffett will likely own the 25% limit by q1 19' due to bb's. Capex hides intrinsic value plus all the noise this name generates = needs to be private now before the smoke clears or the price will be much higher. CMS rate starting to go up at close to inflation for first time in a long while in cy 19.


mwtorock

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Re: DVA – DaVita HealthCare Partners
« Reply #557 on: November 28, 2018, 10:01:49 AM »

Moreover, I'm trading risks here. DVA's risks are known and quantified largely, what about the market/economy? We are at the top of a cycle, what's my downside? Pick your multiple and apply 2-3 b plus fcf to buybacks over the next 2-3 years regardless of what happens in the economy. If dva's price does correlate with the market's in a downturn, that's fine. IIRC, dva was down 23% in the great recession vs 54%ish. In the mean time, I can trim and add as needed. This has been a 10-30% position for me for 1.5 years. Right now it's 25%.

Buffett will likely own the 25% limit by q1 19' due to bb's. Capex hides intrinsic value plus all the noise this name generates = needs to be private now before the smoke clears or the price will be much higher. CMS rate starting to go up at close to inflation for first time in a long while in cy 19.
[/quote]

Pretty much nailed it.


kab60

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Re: DVA – DaVita HealthCare Partners
« Reply #559 on: November 28, 2018, 01:03:19 PM »
Very good points and very well put - interesting point on trading risks. Thanks.