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Davita’s Expenses Continue to Rise: Time to Dump the Stock?

Zacks

On Sep 19, we issued an updated research report on DaVita Inc. DVA.

The Colorado-based company is one of the leading dialysis services providers in the U.S. However, the company has been continuously underperforming over last few quarters. The downward revision of the Zacks Consensus Estimates for both 20176 and 2017 is a clear indication of the same. Poor cost management amid intense competition pose further risks for the Zacks Rank #5 (Strong Sell) company.

The company has been recently rebranded from HealthCare Partners to the DaVita Medical Group and hence, its management expects to spend $5 million to $10 million in 2016. In addition, DaVita will need to accelerate the non-cash amortization of $110 million worth of existing trademark intangibles associated with the legacy HealthCare Partners brand.

Also, DaVita anticipates its dialysis and related lab services general and administrative expenses to increase in the upcoming quarters. The company’s plan to undertake initiatives to improve its information technology infrastructure would also result in higher costs. Investments to support regulatory compliance and legal matters and to tap new business opportunities are also likely to contribute to the increasing expenses.

DaVita’s in-year Medicare Advantage membership growth has been in line with broader enrollment trends and the geographies it operates in.


The company also lowered its full-year 2016 guidance to a range of $110 million to $150 million due to lower-than-expected fee-for-service revenue growth, lesser membership growth in Medicare Advantage and charges related to rebranding from HealthCare Partners to the DaVita Medical Group.

Most of DaVita’s dialysis and related lab service revenues are generated from patients who have commercial payors as the primary payor. Hence, the company’s top line is remains exposed to heavy risk in case people shift from commercial insurance schemes to government schemes due to the wide disparity in payment rates.

Another headwind for DaVita is its dependence upon future borrowings for the repayment of current liquidity and liability needs. The rebranding of HealthCare Partners has substantially increased the company’s outstanding debt level and is likely to result in the rise in borrowing costs and interest expenses going forward. The company’s earnings and cash flow are also expected to be affected by this high leverage.

Stocks to Consider

Invesors can look at some better-ranked stocks from the medical sector like Almost Family Inc. AFAM, RadNet Inc. RDNT and US Physical Thearpy Inc. USPH. All of these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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