DVA – DaVita HealthCare Partners

[ander]

He said in the interview he’s been short for 2 years. He alluded to the court case in FL being a game-changer in that it reference a case which was unsealed this summer where a AKF employee as a whistleblower said they were steering patients to DVA which would be fraud. This has been previously reported. But this would be the AKF in violation. Also, the DOJ decided not to pursue the case. There are also legitimate whistleblower cases but also illegitimate ones where an employee intentionally commits a bad act and then whistleblows on the employer (not saying that’s what happened here).

See link re: summary of lawsuit.
https://www.modernhealthcare.com/legal/whistleblower-alleges-davita-fresenius-involved-kickback-scheme

[ander]

Quite comical that the investment community missed this part I highlighted below. They finished the $2 B buyback and have much more to do. Even today's analyst notes are getting the share count wrong. Still a lot more upside with base business showing stabilization and improvement. The overhangs are the regulatory / ballot initiatives but the dialysis industry has done a good job making the obvious case on behalf of these very sick patients (the structure was set up by the government decades ago re: medicare subsidizing commercial payors).

I just spent time going through their deck in more detail - I didn't think that their leverage was already 3.4x ND / EBITDA as they stated at the Capital Markets Day but needed to understand how they were calculating the number. There's a footnote on the last page which basically explains in the new credit agreement they can only count $750 million of the cash on their balance sheet towards the ND portion of the calc. Based on my numbers (post the share buybacks done), they have closer to $1.4 billion of cash on the balance sheet, so the leverage is really a lot lower. To get to 3.5x ND / EBITDA, they have about $850 million of additional share buybacks left to do. Pretty interesting.

[cubsfan]

Quite comical that the investment community missed this part I highlighted below. They finished the $2 B buyback and have much more to do. Even today's analyst notes are getting the share count wrong. Still a lot more upside with base business showing stabilization and improvement. The overhangs are the regulatory / ballot initiatives but the dialysis industry has done a good job making the obvious case on behalf of these very sick patients (the structure was set up by the government decades ago re: medicare subsidizing commercial payors).

I just spent time going through their deck in more detail - I didn't think that their leverage was already 3.4x ND / EBITDA as they stated at the Capital Markets Day but needed to understand how they were calculating the number. There's a footnote on the last page which basically explains in the new credit agreement they can only count $750 million of the cash on their balance sheet towards the ND portion of the calc. Based on my numbers (post the share buybacks done), they have closer to $1.4 billion of cash on the balance sheet, so the leverage is really a lot lower. To get to 3.5x ND / EBITDA, they have about $850 million of additional share buybacks left to do. Pretty interesting.

So the current share count is 131M - correct? ......and with another $2B @ $70/share, they can get the count down to 100M?

[ander]

I have a slightly lower number than 131 million shares but let’s assume 131. The $2 billion reload we don’t know exact timing. But what’s much more likely based on what they said is that they typically have about $500 million cash on the balance sheet. So if they’re at about $1 billion today that’s an additional $500 million for buyback soon. Plus another more from FCF generation in current quarter - maybe another $150 million or so. So about $650 million in share repurchases in the near term.

The mistake analysts are making in there reports is that they’re not even using the ~130 million share count — that’s already been done! The stock should grind higher as supply comes out but has failed to re-rate multiple times in recent years. But the operating environment is likely to see acceleration into 2021 which helps.

[Happy]

From the call:
Joel DaVita: "So the ending share count at the end of Q3 was just under 134 million, 133.9 million. Remember that excludes the shares we bought back since the quarter ended."

Joel Ackerman: "Since Capital Markets Day, we purchased an additional 8.9 million shares at an average price of $58.90 per share. As a result of these purchases, we've reduced our share count by approximately 36.9 million shares or 22% since the close of the DMG transaction."

So it seems unclear how many shares they already bought back in Q4 to get to the exact sharecount, unless you know what the exact sharecount was at the close of the DMG transaction.

[ander]

From the call:
Joel DaVita: "So the ending share count at the end of Q3 was just under 134 million, 133.9 million. Remember that excludes the shares we bought back since the quarter ended."

Joel Ackerman: "Since Capital Markets Day, we purchased an additional 8.9 million shares at an average price of $58.90 per share. As a result of these purchases, we've reduced our share count by approximately 36.9 million shares or 22% since the close of the DMG transaction."

So it seems unclear how many shares they already bought back in Q4 to get to the exact sharecount, unless you know what the exact sharecount was at the close of the DMG transaction.

That’s incorrect. It’s in the earnings press release. “ In addition to the share repurchases described above, we have also repurchased 4,283,376 shares of our common stock for $246 million at an average cost of $57.32 per share from October 1, 2019 through November 4, 2019. Effective November 4, 2019, our Board of Directors terminated all remaining prior share repurchase authorizations available to us and approved a new share repurchase authorization of $2 billion.”

[5xEBITDA]

Is the market really so inefficient that it is mispricing the share count of a $20 billion Company with over a dozen sell side analysts...?

[ander]

Is the market really so inefficient that it is mispricing the share count of a $20 billion Company with over a dozen sell side analysts...?

Apparently yes. They missed the footnote from the investor day in September (or at least at a minimum didn’t appreciate the implication) and hence the substantial price move up.
And apparently still so. Check the analyst notes.
It’s like the old economics assumption joke that the dollar bill isn’t on the sidewalk because someone else would have already picked it up. Large market cap and well covered increases the odds the dollar bill isn’t there but doesn’t mean that it’s not there.

[5xEBITDA]

Is the market really so inefficient that it is mispricing the share count of a $20 billion Company with over a dozen sell side analysts...?

Apparently yes. They missed the footnote from the investor day in September (or at least at a minimum didn’t appreciate the implication) and hence the substantial price move up.
And apparently still so. Check the analyst notes.
It’s like the old economics assumption joke that the dollar bill isn’t on the sidewalk because someone else would have already picked it up. Large market cap and well covered increases the odds the dollar bill isn’t there but doesn’t mean that it’s not there.

I don't buy it, but that's just my take. After going through several analyst notes to check this out it is evident that some are using reported share counts as of 9/30 while some are using pro-forma share counts that take into consideration the subsequent buybacks, but 100% of analysts are modeling in substantial buybacks through the next several years.

Besides, I don't think the analyst community is "the market". Sell side notes can have mistakes or things that are overlooked, but with a Company this large the market is going to figure it out anyway.