Why Warren Buffett Likes DaVita

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Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) is now the largest shareholder of DaVita (NYSE: DVA) with 13,607,935 shares as of December 31, 2012. Buffett’s holding is worth more than $1.5 billion, which represents 2 percent of his portfolio.

Berkshire Hathaway initially acquired a stake in the DaVita during the fourth quarter of 2011. Since then, the billionaire investor increased his position in the company. During the previous quarter, Berkshire Hathaway purchased more than 3.5 million shares, which shows that the billionaire investor really likes DaVita. Why does Warren Buffett and his new portfolio managers like DaVita? Here are some of the possible reasons:

Increasing Demand for ESRD Treatment

DaVita provides dialysis treatment for patients with chronic kidney failure and end stage renal disease (ESRD). DaVita operates 1,954 outpatient dialysis centers in the United States and 36 outpatient dialysis centers located in five other countries. In the United States alone, DaVita provides services for approximately 153,000 patients. Eighty nine percent (89%) of its patients are covered under government-based programs, particularly Medicare, based on its regulatory filing. This means the company has a steady source of revenue.

The United States Congress enacted the ESRP program requiring Medicare to pay for the pay for hemodialysis, kidney transplant, or other related services of patients regardless of age or circumstances as long as they are eligible for Social Security benefits. Under the Omnibus Budget Reconciliation Act (OBRA) of 1981, the Composite Rate, or the reimbursement method, requires Medicare to pay 80% of the costs of dialysis, laboratory testing, and other related services. Patients will pay the remaining 20 percent through their own health insurance. Companies providing dialysis treatment like DaVita can charge medications separately through the Medicare Part B.

The most common cause of kidney failure is diabetes and high-blood pressure, according to the National Kidney and Urologic Diseases Information Clearing House, (NKUDIC). Data from the American Diabetes Association showed that there are 25.8 million people with diabetes. There are 100,000 people diagnosed with kidney failure every year. The United States government is spending billions of dollars for the treatment of patients with kidney failure. In 2012, Medicare spent $33 billion for ESRD patients, which accounts 6.3% of its budget.

Between1980 to 2009, the prevalent rate for ESRD increased by almost 600 percent, from 290 to 1,738 cases per million. 

<img alt="" src="http://g.fool.com/editorial/images/23677/esrd-cases_large.JPG" />

The increasing number of people diagnosed with chronic kidney failure and ESRD guarantees that DaVita’s business will continue to grow. Patients need treatment from a company that provides quality treatment & services at a more affordable price, and most importantly accepts Medicare.

Financial Performance

Over the past ten years, DaVita has a good financial performance with revenue growth at 16.3% and EBITDA growth at 15.2%. Its Free Cash Flow (FCF) and book value growth were 13.2% percent and 26.3%, respectively. From 2003 to 2012, the company’s revenue increased from $2.04 billion to $8.1 billion, and net income surged from $176 million to $536 million. Its annual earnings per share grew from $1.86 to $6.25 over the past ten years.

The stock price of the company increased from its lowest level at $77 per share to its highest level at around $124 a share over the 52-week range. 

<img alt="" src="http://g.fool.com/editorial/images/23677/davita-stock-chart_large.JPG" />

Source: Yahoo! Finance

Over the past year, DaVita’s stock delivered 36.03% total returns, higher than the 9.60% total returns of the S&P 500. Its stock performance is also better than its primary competitor, Fresenius Medical Care (NYSE: FMS) with 2.22% returns in one year.

Partnership & Expansion

Fresenius Medical Care provides dialysis for patients suffering from chronic kidney failure with 3,160 dialysis centers in North America, Latin America, Europe, Africa, and Asia Pacific region. The company is providing dialysis treatment for 257, 916 patients worldwide. In 2012, the company posted $13.8 billion revenue and $1.18 billion net income or $3.89 earnings per share.

Early this year, DaVita announced its partnership with Fresenius Medical Care. Under its agreement, DaVita will provide certain pharmacy services to Fresenius Medical Care starting on the latter part of 2013. The agreement allows DaVita to generate additional revenue and enables Fresenius Medical Care to comply with the requirement of the U.S. Congress that some ESRD medications should be included in a bundled payment. DaVita Rx is the largest full-service pharmacy dedicated for the needs of kidney patients.

In 2012, DaVita expanded its business by acquiring 22 dialysis centers and opening additional 22 dialysis centers in the United States. The company also purchased 10 dialysis centers and opened two dialysis centers in other countries.

Conclusion

DaVita’s financial record shows that its earnings and revenue grew steadily and it has the ability to maintain its profitability in the years ahead. The outstanding performance reflects that it has a good and capable management team. The company received numerous awards such as the Fortune World’s Most Admired Companies (from 2006 to 2012) and ranked third among health care facilities and number one in innovation. The Training Magazine also recognized the company as the number one national health care provider for employee training programs.

I think the best thing about investing in the DaVita is that investors can easily predict its revenue growth based on the trend of the increasing number of people with kidney problems, and most importantly, their investments enable the company to expand and provide treatments to kidney patients.


Marivic Cabural has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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