A Healthcare Provider Warren Buffett is Excited About
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, the most successful investor in the world, Warren Buffett has topped off his position in DaVita (NYSE: DVA) for an average price of $107.80. Now his company, Berkshire Hathaway (NYSE: BRK-A) owns more than 9.6 million shares, equivalent to 10.8% of the company. Berkshire first bought 2.7 million shares of DaVita at the end of 2011 for around $71 per share. Since then, DaVita has experienced a continuous upswing.
DaVita’s current operating performance
Investors might wonder whether we should follow smart money? Of course, we should follow the smart money, but in a smart way.
DaVita is a provider of dialysis services for 142,000 patients through more than 1,800 outpatient centers in the US. It also has inpatient dialysis services in 900 hospitals. The company is headquartered in Denver, Colorado. Let’s look at DaVita in operating metrics table to see how it is performing right now.
|
TTM |
|
|
Operating margin (%) |
16.3 |
|
Net margin (%) |
7 |
|
ROE (%) |
24.6 |
|
D/E (%) |
179 |
|
Interest Coverage |
4.7 |
|
Dividend yield (%) |
N/A |
|
P/E |
20.2 |
|
P/B |
4.4 |
|
EV/FCF |
21.4 |
DaVita has been operating in quite an efficient manner. Its operating margin is 16.3% and its net margin stays at 7%. In addition, the company delivers high return on equity of 24.6%. The high return on equity is due to Davita's high leverage. The reason for its high leverage is twofold:(1) high long-term debt and (2) the amount of stock repurchases. As of June 2012, treasury stock was nearly $1.6 billion in total stockholders’ equity of $2.38 billion. Although DaVita carries debt, it’s quite comfortable with 4.7 times interest coverage.
Industry peers
In the healthcare provider industry, DaVita seems to have the most profitable operating performance compared to its peers, including Fresenius Medicare Care AG (NYSE: FMS) and Hanger (NYSE: HGR).
|
|
DVA |
FMS |
HGR |
|
Operating margin (%) |
16.3 |
16.27 |
12.72 |
|
ROE (%) |
24.64 |
12.71 |
13.6 |
|
D/E (%) |
175 |
65 |
116 |
|
P/E |
18.1 |
20.8 |
16.3 |
It enjoys the highest operating margin and return on equity. Its recent ROE is twice as high as those of RMS and HGR. Furthermore, DVA looks reasonable at 18.1x P/E. From the table, FMS looks quite good with the same level of operating margin while employing the least leverage among the three. But it is the most expensive one, trading at 20.8x P/E.
The financial weaknesses in DVA are (1) lots of leverage and (2) negative tangible book value. As of June 2012, DVA has a tangible book value of $-30.4 per share; it was due to $4.5 billion interest-bearing debt and $5.2 billion in goodwill on only $2.37 billion stockholders’ equity. FMS and HGR have negative tangible book value as well, but less negative than DVA. Tangible book value of FMS and HGR are -$4.7 and -$6.2 per share, respectively.
My Foolish take
Berkshire Hathaway might be bullish about DaVita by adding more to its current position in this year. However, personally I would not consider investing in DaVita at the current moment because of the following:
- High leverage level compared to its peers.
- Negative tangible book value with high level of goodwill.
- Even with reasonable P/E, the stock has risen to its 10-year high
- The market value of DaVita is a little more than $1 billion. It accounts for only around 1.34% of the total marketable securities portfolio of $74.5 billion of Berkshire Hathaway.
hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
