Thursday, August 29, 2013

The "Obesi-fication of America": Part 2- DaVita HealthCare Partners (DVA)-Congress May Not Trim All The Fat

Last week, I posted the first part of a series on the topic on the "obesi-fication" of America.  (See link above or Tweet below)

This post is Part 2 and updates some thoughts on DaVita HealthCare Partners (DVA), a major player in kidney dialysis centers. For starters, here's a Morningstar research description of DVA's business and a succinct statement of the pros and cons:

DaVita HealthCare Partners Inc operates kidney dialysis centers and provides related lab services mainly in dialysis centers and in contracted hospitals across the United States. It also operates other ancillary services and strategic initiatives.
DaVita's dominance in the U.S. dialysis market makes this company a standout provider in the health care industry, but the merger with HealthCare Partners, which now represents nearly one-fourth of revenue, has shifted a portion of its business model. The merger acknowledges the evolution of health care delivery in the U.S. and may offer some competitive advantages over the long term, but we're skeptical this deal will create shareholder value, as it also adds considerable operating risk. Despite the merger risks, we believe DaVita's strength in the U.S. dialysis market will remain the near-term foundation of the company's earnings potential and economic moat.
The stock peaked in May and took a serious tumble in early July on word that Medicare cuts could take a close to 10% bite out of their business.  Subsequent reports on America's struggle with obesity (which has been found to lead to diabetes which, in turn, often leads to kidney problems and the need for dialysis) did little to help the stock, especially in the face of the overall equity market's malaise in recent weeks. 

Today, however, there was a report which could augur well for the stock, reported in the NYTimes regarding many in Congress who are now not in favor of budge cuts that could hit dialysis patients so strongly.  To quote from the NYT article:
Eight months ago, Congress ordered the Obama administration to eliminate a stark example of federal government waste: more than $500 million a year in excessive drug payments being sent to dialysis clinics nationwide. But in a demonstration of just how hard it is to curb spending in Washington, more than 100 of the same members of Congress who voted in January to impose the cut are now trying to push the Obama administration to reverse it or water it down.

Reimbursement risk is a reality that virtually all companies in the medical and pharma related spaces face, and DVA, being one of two dominant players in the entire dialysis centers market in the US is clearly front and center with a reimbursement risk target on its back.  But Morningstar research makes a noteworthy point on this:

Patients covered by Medicare and Medicaid comprise 90% of DaVita's treatments and 66% of revenue, but margins on these patients are razor thin. The company's 10% commercially insured treatments therefore make up most of DaVita's reported profits.
There's nothing to say for sure that the stock has found a floor at the 108/109 area, but coming off the highs of close to $130/sh with DVA being one of two companies that collectively dominate almost 3/4s of the market share in the US, expanding their business internationally, and facing the opportunity (sad though it is) noted in the obesity statistics and charts that were posted in part 1 of this series (sourced from the Centers for Disease Control), DVA is worthy of close consideration.  
(Disclosure: We have an "entry level" position of 1.5% of the portfolio).
Stay tuned for updates on Washington's budget negotiations in coming weeks and on how that could impact DVA.

Please continue to visit Soos Global Market Musings for updates.
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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Additional Disclaimer: currently long many stocks/ETFs and DVA.  Positions may change at any time without notice.

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