DVA – DaVita HealthCare Partners

[ander]

I saw UBS initiated with a Sell rating. I don't have access to the note. Anyone know if any incremental fundamental insights in the note?

[ander]

Actually got the note. Some excerpts.

 

DVA's stock has underperformed for 3-4 years while cloaked in a cloud of controversy.

Poor execution (DMG), California risks, payer/federal policy oversight, investigations and

now perceived interloper risks all color a complicated backdrop. DVA carries elevated

tail-risks into 2019 that potentially compromise earnings, sentiment, and the valuation.

We see exogenous factors limiting upside in the multiple (labor union and UNH/CVS

strategies) and heightened risk from payer mix and underwhelming organic growth not

priced into the outer-years threatening downward revisions to earnings. Sell.

 

Heightened attention on payer mix and pricing

US Renal Dialysis System (USRDS) data indicates pre-65 incidence rates (proxy for

commercial population) has declined for two years. 1Q18 rates decelerated 3% y/y

(steepest ever). If this trend continues, it raises the specter of long-term headwinds to

mix and margin compression.

 

Tail-risk remains elevated into 2019

The cons outweigh the pros (valuation). Probability of labor union (SEIU) success in

California grows in 2019 as Governor Newsom is pro-union (returned campaign

contributions to dialysis organizations). Our 2021e EPS contemplates a $140m OI cut

(minimum staffing bill). Perceived 'interloper' risks grow as CVS/UNH discuss emerging

dialysis strategies. Closing DMG is the only NT catalyst we see and well-known

buybacks are likely discounted. Industry in-fighting on the PATIENTS Act makes

underwriting long-term growth via integrated care difficult. Industry backdrop is tough.

 

Valuation: Our DCF-derived PT of $64 implies 11.9x 2020E EPS

 

[ander]

Note the 8-k from yesterday after the close, but dated from last week (at least I only saw it on the wires yesterday). Increases debt covenants for deal closing. Maybe implies they’re buying back more shares recently and currently.

 

http://investors.davita.com/static-/785e52fe-a376-41c1-99ca-6056ad0fafb0

 

[flesh]

What I find interesting about dva is from a p equity perspective of steady state cash flow. There's a huge divergence between maintenance and growth capex here, perhaps 400m, likely even less M capex ex ROW, which you could sell. Importantly, you could actually not grow this company and soak up all that cash without hurting the business in the usa. Most companies don't have such a divergence and when they do it's not very clear exactly what's required for true maintenance considering all the extraneous factors/moat, etc. For a cherry on top, you can lever it to the sky. You can maintain the vast majority of those cash flows in recessions to add to whatever else your doing.

[vince]

What I find interesting about dva is from a p equity perspective of steady state cash flow. There's a huge divergence between maintenance and growth capex here, perhaps 400m, likely even less M capex ex ROW, which you could sell. Importantly, you could actually not grow this company and soak up all that cash without hurting the business in the usa. Most companies don't have such a divergence and when they do it's not very clear exactly what's required for true maintenance considering all the extraneous factors/moat, etc. For a cherry on top, you can lever it to the sky. You can maintain the vast majority of those cash flows in recessions to add to whatever else your doing.

 

Flesh, mgmt is guiding to increased levels of capex for the foreseeable future which makes those expenditures maintenance almost by definition. And I dont see a step up in growth rates.  Unless you are privy to information that I havent come across then I wouldnt be so confident that you can categorize the increased levels as growth.  Maybe you can explain how you have determined 400 million of capex as growth?   

[kab60]

That's actually a big part of why I've stayed on the sidelines; the capex is high and there's not much growth to show for it. (and then there's the regulatory risks that I can't handicap but I pretty much stop after looking at the cash flows). What's your take on FCF atm flesh and expected growth in those if you don't mind?

[flesh]

That's actually a big part of why I've stayed on the sidelines; the capex is high and there's not much growth to show for it. (and then there's the regulatory risks that I can't handicap but I pretty much stop after looking at the cash flows). What's your take on FCF atm flesh and expected growth in those if you don't mind?

 

Hey buddy, nothing much different to say than whats been said.

 

Using current capex and operating cash flow of 1.5-1.6b minus 5b in cash ex dmg plus the higher leverage ratio of recent note going towards buybacks you get somewhat cheap. I assume it will grow earnings a few % a year before bb's. I'm assuming around 2-3 b will go towards debt immediately, per the recent note and extra 1b taken out earlier this year for bb's. The reduced shares and debt interest will raise earnings a fair amount ceteris paribus. DMG is adding virtually no gaap eps. It's mostly been negative in any given cy since the time of purchase. Some of the eps gain has been masked by the extra debt, that's about to change, more bb's and less debt together at a lower ev.

 

Where I probably diverge from some is that I do believe the intrinsic value can largely be attributed to steady state fcf with this name per last post. To get a sense for what capex needs to be you can look at dva pre dmg or healthcare partners, for perhaps a few years or more as a % of sales, ebitda, etc. Fine tune it by considering how large intl was then vs now. Has anything really changed in terms of what capex dva usa should require since then? Should it be more than double or perhaps 25% more?

 

Moreover, I'm trading risks here. DVA's risks are known and quantified largely, what about the market/economy? We are at the top of a cycle, what's my downside? Pick your multiple and apply 2-3 b plus fcf to buybacks over the next 2-3 years regardless of what happens in the economy. If dva's price does correlate with the market's in a downturn, that's fine. IIRC, dva was down 23% in the great recession vs 54%ish. In the mean time, I can trim and add as needed. This has been a 10-30% position for me for 1.5 years. Right now it's 25%.

 

Buffett will likely own the 25% limit by q1 19' due to bb's. Capex hides intrinsic value plus all the noise this name generates = needs to be private now before the smoke clears or the price will be much higher. CMS rate starting to go up at close to inflation for first time in a long while in cy 19.

 

 

[mwtorock]

 

Moreover, I'm trading risks here. DVA's risks are known and quantified largely, what about the market/economy? We are at the top of a cycle, what's my downside? Pick your multiple and apply 2-3 b plus fcf to buybacks over the next 2-3 years regardless of what happens in the economy. If dva's price does correlate with the market's in a downturn, that's fine. IIRC, dva was down 23% in the great recession vs 54%ish. In the mean time, I can trim and add as needed. This has been a 10-30% position for me for 1.5 years. Right now it's 25%.

 

Buffett will likely own the 25% limit by q1 19' due to bb's. Capex hides intrinsic value plus all the noise this name generates = needs to be private now before the smoke clears or the price will be much higher. CMS rate starting to go up at close to inflation for first time in a long while in cy 19.

 

Pretty much nailed it.

[flesh]

https://www.reuters.com/article/health-davita/davita-settles-with-dialysis-patients-families-over-deaths-for-25-5-mln-idUSL2N1XJ1XB

 

Lol, just noticed this myself.

 

Also,

 

https://www.dmhc.ca.gov/AbouttheDMHC/Newsroom/November28,2018.aspx

 

Approves acquisition.

 

 

[kab60]

Very good points and very well put - interesting point on trading risks. Thanks.

[vince]

That's actually a big part of why I've stayed on the sidelines; the capex is high and there's not much growth to show for it. (and then there's the regulatory risks that I can't handicap but I pretty much stop after looking at the cash flows). What's your take on FCF atm flesh and expected growth in those if you don't mind?

 

Hey buddy, nothing much different to say than whats been said.

 

Using current capex and operating cash flow of 1.5-1.6b minus 5b in cash ex dmg plus the higher leverage ratio of recent note going towards buybacks you get somewhat cheap. I assume it will grow earnings a few % a year before bb's. I'm assuming around 2-3 b will go towards debt immediately, per the recent note and extra 1b taken out earlier this year for bb's. The reduced shares and debt interest will raise earnings a fair amount ceteris paribus. DMG is adding virtually no gaap eps. It's mostly been negative in any given cy since the time of purchase. Some of the eps gain has been masked by the extra debt, that's about to change, more bb's and less debt together at a lower ev.

 

Where I probably diverge from some is that I do believe the intrinsic value can largely be attributed to steady state fcf with this name per last post. To get a sense for what capex needs to be you can look at dva pre dmg or healthcare partners, for perhaps a few years or more as a % of sales, ebitda, etc. Fine tune it by considering how large intl was then vs now. Has anything really changed in terms of what capex dva usa should require since then? Should it be more than double or perhaps 25% more?

 

Moreover, I'm trading risks here. DVA's risks are known and quantified largely, what about the market/economy? We are at the top of a cycle, what's my downside? Pick your multiple and apply 2-3 b plus fcf to buybacks over the next 2-3 years regardless of what happens in the economy. If dva's price does correlate with the market's in a downturn, that's fine. IIRC, dva was down 23% in the great recession vs 54%ish. In the mean time, I can trim and add as needed. This has been a 10-30% position for me for 1.5 years. Right now it's 25%.

 

Buffett will likely own the 25% limit by q1 19' due to bb's. Capex hides intrinsic value plus all the noise this name generates = needs to be private now before the smoke clears or the price will be much higher. CMS rate starting to go up at close to inflation for first time in a long while in cy 19.

 

2 things....First you are valuing DVA using cash flow but then talk about DMG's effect on eps.  DMG had very healthy cash flows (add about 100 million to their earnings annually for 10 years if I remember correctly) because of the asset step up for tax purposes.  Second, while I don't necessarily disagree with your "undervalued based on steady state cash flow" you haven't addressed the issue of elevated capex which means true cash flow is unknown at the moment.  I'm rather perplexed that mgmt (which has been phenomenal historically) hasnt really explained the massive increase.....at least I haven't seen a good explanation but I haven't followed them closely for a while.  I was hoping you had a good explanation for why maintenance capex had doubled all of a sudden.  If we had this information then we could be confident what the longer term run rate would be rather than just guessing based on historical numbers.  But I do tend to agree with you that its probably a good investment at these levels, I just can't tell how good.

[MrB]

It seems the above discussion around capex is using the term loosely, so I'm assuming that's the case. It's really about FCF at the end of the day.

 

From the last call,

"Lastly, let me provide guidance for 2018. For our annual adjusted operating income guidance, we're narrowing the

range to $1.5 billion to $1.25 billion. This guidance is at the low end of the range we specified last quarter. There

are two reasons for this. First is, we spent $20 million more for advocacy, but we feel great about the results.

Second is $23 million for a change in our executive, retirement policy which Joel will discuss"

 

G&A cost increased significantly in the quarter due to two items. First, $45 million in advocacy spend, a $32

million quarter-over-quarter increase. This is in the dialysis and lab segment. Second,

approximately $23 million non-cash charge for modifying and accelerating existing

equity awards due to the adoption of a retirement policy on the treatment of equity awards held by executive officers.

This is in the corporate G&A segment"

______________

"Justin Lake Analyst, Wolfe Research LLC Q

Okay. And then as we think about the underlying run rate of OI coming out of 2018, again with all these moving

parts, how should we think about the right jump off point for 2018 OI going into 2019, once we remove kind of the

charges that aren't going to continue into next year?

 

Joel Ackerman Chief Financial Officer, DaVita, Inc. A

Yeah. So, I guess, I would start with kind of the 2018 guidance we've given you and then you'd really want to

normalize for a bunch of things. So there is advocacy, which we've talked about, this retirement policy change,

there's the Medicare bad debt which showed up in the first half of the year; and then two other things I'd call out;

one is DaVita Rx which we've called out as a headwind in the back half of the year of $20 million to $35 million

and the third was a one-time good guide from DHS of $17 million at the beginning of the year which we also

called out."

 

___________________

 

"Kevin Mark Fischbeck Analyst, Bank of America Merrill Lynch Q

Yeah, so you took the guidance from $1.5 billion to $1.6 billion down – the high end of the range from $1.6 billion

down to $1.525 billion, so you took it down by about $75 million. And there's two discrete items you called out,

advocacy was $20 million more than you had last quarter and then your stock comp was $23 million more, that's

$43 million right there. But in answer to Justin's question earlier, you kind of said the core business was coming

inline if not slightly better than you thought, so why is the high end coming down even more than the range, than

that $43 million?

 

Joel Ackerman Chief Financial Officer, DaVita, Inc. A

Yeah, so look we guide to a range for a reason there. There are fluctuations as you would expect and as we look

at those, we're comfortable with coming in at this $1.5 billion to $1.525 billion, I don't think there is anything

specific that I would point out."

_________

 

I think the key to the above potentially lies in the advocacy costs. Unless I'm reading the above posts incorrectly it seems the FCF is under pressure due to costs other than Capex (advocacy is G&A), but impact on FCF is the same.

___________

 

"In pursuing Proposition 8, we believe that the SEIU-UHW abuse of ballot initiative process and displays disregard

for patients by putting the union's organizing objectives above access to life-sustaining care. Unfortunately, we do

not anticipate them stopping their efforts. We expect this to cause us to spend considerable resource opposing

these types of initiatives over the next years. While it's difficult to forecast we're assuming an increase in our

baseline spend of $30 million per year on general advocacies plus whatever incremental spend is necessary to

counter the specific initiative."

[Spekulatius]

I haven’t looked at DVA balance sheet in much detail, but the $250-300M in maintenance Capex seems too low relative to the $3.1B in PPE. The dialysis machines and fixtures in their dialysis centers won’t last 10 years for sure ($3.1/10=$310M depreciation). Why not go with their $580M in depreciation  from their annual report. Unless it contains a whole lot of intangible amortization, they ought to be close to the correct number for maintenance capex.

[vince]

I haven’t looked at DVA balance sheet in much detail, but the $250-300M in maintenance Capex seems too low relative to the $3.1B in PPE. The dialysis machines and fixtures in their dialysis centers won’t last 10 years for sure ($3.1/10=$310M depreciation). Why not go with their $580M in depreciation  from their annual report. Unless it contains a whole lot of intangible amortization, they ought to be close to the correct number for maintenance capex.

 

Spec, if I reember correctly mgmt has in the past specified what percentage of capex was maintenance and it was significantly lower than 580.  That may have been before the acquisition but even taking that into consideration the 580 looks high and their new run rate is off the charts relative to their historical maintenance capex.  I do believe there is a positive plausible explanation but I just havent seen it....thats why I asked. 

[vince]

It seems the above discussion around capex is using the term loosely, so I'm assuming that's the case. It's really about FCF at the end of the day.

 

From the last call,

"Lastly, let me provide guidance for 2018. For our annual adjusted operating income guidance, we're narrowing the

range to $1.5 billion to $1.25 billion. This guidance is at the low end of the range we specified last quarter. There

are two reasons for this. First is, we spent $20 million more for advocacy, but we feel great about the results.

Second is $23 million for a change in our executive, retirement policy which Joel will discuss"

 

G&A cost increased significantly in the quarter due to two items. First, $45 million in advocacy spend, a $32

million quarter-over-quarter increase. This is in the dialysis and lab segment. Second,

approximately $23 million non-cash charge for modifying and accelerating existing

equity awards due to the adoption of a retirement policy on the treatment of equity awards held by executive officers.

This is in the corporate G&A segment"

______________

"Justin Lake Analyst, Wolfe Research LLC Q

Okay. And then as we think about the underlying run rate of OI coming out of 2018, again with all these moving

parts, how should we think about the right jump off point for 2018 OI going into 2019, once we remove kind of the

charges that aren't going to continue into next year?

 

Joel Ackerman Chief Financial Officer, DaVita, Inc. A

Yeah. So, I guess, I would start with kind of the 2018 guidance we've given you and then you'd really want to

normalize for a bunch of things. So there is advocacy, which we've talked about, this retirement policy change,

there's the Medicare bad debt which showed up in the first half of the year; and then two other things I'd call out;

one is DaVita Rx which we've called out as a headwind in the back half of the year of $20 million to $35 million

and the third was a one-time good guide from DHS of $17 million at the beginning of the year which we also

called out."

 

___________________

 

"Kevin Mark Fischbeck Analyst, Bank of America Merrill Lynch Q

Yeah, so you took the guidance from $1.5 billion to $1.6 billion down – the high end of the range from $1.6 billion

down to $1.525 billion, so you took it down by about $75 million. And there's two discrete items you called out,

advocacy was $20 million more than you had last quarter and then your stock comp was $23 million more, that's

$43 million right there. But in answer to Justin's question earlier, you kind of said the core business was coming

inline if not slightly better than you thought, so why is the high end coming down even more than the range, than

that $43 million?

 

Joel Ackerman Chief Financial Officer, DaVita, Inc. A

Yeah, so look we guide to a range for a reason there. There are fluctuations as you would expect and as we look

at those, we're comfortable with coming in at this $1.5 billion to $1.525 billion, I don't think there is anything

specific that I would point out."

_________

 

I think the key to the above potentially lies in the advocacy costs. Unless I'm reading the above posts incorrectly it seems the FCF is under pressure due to costs other than Capex (advocacy is G&A), but impact on FCF is the same.

___________

 

"In pursuing Proposition 8, we believe that the SEIU-UHW abuse of ballot initiative process and displays disregard

for patients by putting the union's organizing objectives above access to life-sustaining care. Unfortunately, we do

not anticipate them stopping their efforts. We expect this to cause us to spend considerable resource opposing

these types of initiatives over the next years. While it's difficult to forecast we're assuming an increase in our

baseline spend of $30 million per year on general advocacies plus whatever incremental spend is necessary to

counter the specific initiative."

 

Mr B...I am not looking at free cash flow and then concluding that it is lower because of capex.  I am looking at the difference between what their capex used to be relative to what mgmt is guiding to.  It's not a question of why fcf is low, we already know its because of elevated capex.  The question is why is it so elevated and more importantly why is mgmt guiding to a higher rate for the forseeable future.

[MrB]

It seems the above discussion around capex is using the term loosely, so I'm assuming that's the case. It's really about FCF at the end of the day.

 

From the last call,

"Lastly, let me provide guidance for 2018. For our annual adjusted operating income guidance, we're narrowing the

range to $1.5 billion to $1.25 billion. This guidance is at the low end of the range we specified last quarter. There

are two reasons for this. First is, we spent $20 million more for advocacy, but we feel great about the results.

Second is $23 million for a change in our executive, retirement policy which Joel will discuss"

 

G&A cost increased significantly in the quarter due to two items. First, $45 million in advocacy spend, a $32

million quarter-over-quarter increase. This is in the dialysis and lab segment. Second,

approximately $23 million non-cash charge for modifying and accelerating existing

equity awards due to the adoption of a retirement policy on the treatment of equity awards held by executive officers.

This is in the corporate G&A segment"

______________

"Justin Lake Analyst, Wolfe Research LLC Q

Okay. And then as we think about the underlying run rate of OI coming out of 2018, again with all these moving

parts, how should we think about the right jump off point for 2018 OI going into 2019, once we remove kind of the

charges that aren't going to continue into next year?

 

Joel Ackerman Chief Financial Officer, DaVita, Inc. A

Yeah. So, I guess, I would start with kind of the 2018 guidance we've given you and then you'd really want to

normalize for a bunch of things. So there is advocacy, which we've talked about, this retirement policy change,

there's the Medicare bad debt which showed up in the first half of the year; and then two other things I'd call out;

one is DaVita Rx which we've called out as a headwind in the back half of the year of $20 million to $35 million

and the third was a one-time good guide from DHS of $17 million at the beginning of the year which we also

called out."

 

___________________

 

"Kevin Mark Fischbeck Analyst, Bank of America Merrill Lynch Q

Yeah, so you took the guidance from $1.5 billion to $1.6 billion down – the high end of the range from $1.6 billion

down to $1.525 billion, so you took it down by about $75 million. And there's two discrete items you called out,

advocacy was $20 million more than you had last quarter and then your stock comp was $23 million more, that's

$43 million right there. But in answer to Justin's question earlier, you kind of said the core business was coming

inline if not slightly better than you thought, so why is the high end coming down even more than the range, than

that $43 million?

 

Joel Ackerman Chief Financial Officer, DaVita, Inc. A

Yeah, so look we guide to a range for a reason there. There are fluctuations as you would expect and as we look

at those, we're comfortable with coming in at this $1.5 billion to $1.525 billion, I don't think there is anything

specific that I would point out."

_________

 

I think the key to the above potentially lies in the advocacy costs. Unless I'm reading the above posts incorrectly it seems the FCF is under pressure due to costs other than Capex (advocacy is G&A), but impact on FCF is the same.

___________

 

"In pursuing Proposition 8, we believe that the SEIU-UHW abuse of ballot initiative process and displays disregard

for patients by putting the union's organizing objectives above access to life-sustaining care. Unfortunately, we do

not anticipate them stopping their efforts. We expect this to cause us to spend considerable resource opposing

these types of initiatives over the next years. While it's difficult to forecast we're assuming an increase in our

baseline spend of $30 million per year on general advocacies plus whatever incremental spend is necessary to

counter the specific initiative."

 

Mr B...I am not looking at free cash flow and then concluding that it is lower because of capex.  I am looking at the difference between what their capex used to be relative to what mgmt is guiding to.  It's not a question of why fcf is low, we already know its because of elevated capex.  The question is why is it so elevated and more importantly why is mgmt guiding to a higher rate for the forseeable future.

 

Fair enough. Following from the Q1 call might be helpful

 

"Now, on to CapEx. First, I wanted to add some detail to our disclosure about our development CapEx. Included in the development CapEx in Table 7 of our press release is capital that we spend for buildings we develop from the ground-up, which we then sell and lease back, as well as the full CapEx amount for clinics that are owned with JV partners.

For both these items, a portion of the capital outlay is temporary and eventually covered by either the buyers of the building or our JV partners. To ensure you have the details to take these factors into consideration when evaluating our cash flow, I would point you to a new line we added to Table 7 called sale of self-developed real estate projects, and to the contributions from non-controlling interest line in our cash flow statement. We hope these will help bridge an accounting view of CapEx to more economic view of cash generation of the business. We continue to expect total CapEx for continuing operations to be around $925 million for 2018. This includes some non-recurring capital spend in 2018. We still expect 2019 CapEx to be more in line with 2017 spend of approximately $800 million."

[cubsfan]

Mr B - you are all over this - thank you!

[MrB]

Mr B - you are all over this - thank you!

Not so sure about that, but thank you.

[DooDiligence]

Mr B - you are all over this - thank you!

 

Big ups to this sentiment and I'd add that B is all over a number of other issues.

 

I'll bet he kills it over the next decade!

 

Nagging Q, who is in the avatar photo?

[Peregrino]

It's Mrs. B of the Nebraska Furniture Mart

[DooDiligence]

It's Mrs. B of the Nebraska Furniture Mart

 

Nice, thanks  ;)

[vince]

It seems the above discussion around capex is using the term loosely, so I'm assuming that's the case. It's really about FCF at the end of the day.

 

From the last call,

"Lastly, let me provide guidance for 2018. For our annual adjusted operating income guidance, we're narrowing the

range to $1.5 billion to $1.25 billion. This guidance is at the low end of the range we specified last quarter. There

are two reasons for this. First is, we spent $20 million more for advocacy, but we feel great about the results.

Second is $23 million for a change in our executive, retirement policy which Joel will discuss"

 

G&A cost increased significantly in the quarter due to two items. First, $45 million in advocacy spend, a $32

million quarter-over-quarter increase. This is in the dialysis and lab segment. Second,

approximately $23 million non-cash charge for modifying and accelerating existing

equity awards due to the adoption of a retirement policy on the treatment of equity awards held by executive officers.

This is in the corporate G&A segment"

______________

"Justin Lake Analyst, Wolfe Research LLC Q

Okay. And then as we think about the underlying run rate of OI coming out of 2018, again with all these moving

parts, how should we think about the right jump off point for 2018 OI going into 2019, once we remove kind of the

charges that aren't going to continue into next year?

 

Joel Ackerman Chief Financial Officer, DaVita, Inc. A

Yeah. So, I guess, I would start with kind of the 2018 guidance we've given you and then you'd really want to

normalize for a bunch of things. So there is advocacy, which we've talked about, this retirement policy change,

there's the Medicare bad debt which showed up in the first half of the year; and then two other things I'd call out;

one is DaVita Rx which we've called out as a headwind in the back half of the year of $20 million to $35 million

and the third was a one-time good guide from DHS of $17 million at the beginning of the year which we also

called out."

 

___________________

 

"Kevin Mark Fischbeck Analyst, Bank of America Merrill Lynch Q

Yeah, so you took the guidance from $1.5 billion to $1.6 billion down – the high end of the range from $1.6 billion

down to $1.525 billion, so you took it down by about $75 million. And there's two discrete items you called out,

advocacy was $20 million more than you had last quarter and then your stock comp was $23 million more, that's

$43 million right there. But in answer to Justin's question earlier, you kind of said the core business was coming

inline if not slightly better than you thought, so why is the high end coming down even more than the range, than

that $43 million?

 

Joel Ackerman Chief Financial Officer, DaVita, Inc. A

Yeah, so look we guide to a range for a reason there. There are fluctuations as you would expect and as we look

at those, we're comfortable with coming in at this $1.5 billion to $1.525 billion, I don't think there is anything

specific that I would point out."

_________

 

I think the key to the above potentially lies in the advocacy costs. Unless I'm reading the above posts incorrectly it seems the FCF is under pressure due to costs other than Capex (advocacy is G&A), but impact on FCF is the same.

___________

 

"In pursuing Proposition 8, we believe that the SEIU-UHW abuse of ballot initiative process and displays disregard

for patients by putting the union's organizing objectives above access to life-sustaining care. Unfortunately, we do

not anticipate them stopping their efforts. We expect this to cause us to spend considerable resource opposing

these types of initiatives over the next years. While it's difficult to forecast we're assuming an increase in our

baseline spend of $30 million per year on general advocacies plus whatever incremental spend is necessary to

counter the specific initiative."

 

Mr B...I am not looking at free cash flow and then concluding that it is lower because of capex.  I am looking at the difference between what their capex used to be relative to what mgmt is guiding to.  It's not a question of why fcf is low, we already know its because of elevated capex.  The question is why is it so elevated and more importantly why is mgmt guiding to a higher rate for the forseeable future.

 

Fair enough. Following from the Q1 call might be helpful

 

"Now, on to CapEx. First, I wanted to add some detail to our disclosure about our development CapEx. Included in the development CapEx in Table 7 of our press release is capital that we spend for buildings we develop from the ground-up, which we then sell and lease back, as well as the full CapEx amount for clinics that are owned with JV partners.

For both these items, a portion of the capital outlay is temporary and eventually covered by either the buyers of the building or our JV partners. To ensure you have the details to take these factors into consideration when evaluating our cash flow, I would point you to a new line we added to Table 7 called sale of self-developed real estate projects, and to the contributions from non-controlling interest line in our cash flow statement. We hope these will help bridge an accounting view of CapEx to more economic view of cash generation of the business. We continue to expect total CapEx for continuing operations to be around $925 million for 2018. This includes some non-recurring capital spend in 2018. We still expect 2019 CapEx to be more in line with 2017 spend of approximately $800 million."

 

Much appreciated, that definitely makes it clearer.  However, (and keep in mind I haven't done the necessary work in last couple years) I thought they always did this so it is still confusing as to why the change....even 800 is well above what I remember their capex was a few years ago.  Then again, maybe I'm just plain wrong.

[flesh]

Let's look at dva pre DMG, the last full year is 2011. We'll use 2011 d&a as a proxy for steady state capex. Clearly, this is high level.

 

In 2011, D&a is 4% of revenue

 

2007-2011 average of d&a is 31% of OCF

 

In the ttm, on the dialysis side ex dmg, D&A is 6% of revenue and 42.4% of OCF.

 

2% of ttm rev is 208m. 11.4% ttm OCF is 160m. NTM OCF is higher than TTM by 75m fyi.

 

If we take the ttm d&a of 620 and subract 208= 412m. If we subtract 160=460m.

 

The differences are too large.

 

DVA was already on a acquisitive spree pre 2011, 2011 d&a had some non economic A in there. If we assume zero margin expansion and capex costs rising with inflation since 2011, the numbers would be a bit worse but still a whole lot better than current D&A. OTOH, international D&A as a % is greater now than then, presumably it will pay off. The way I see intrinsic value is this, dmg gone, international sold (reducing ev but not eps/fcf), maintain but don't grow usa except organically(rare business, moat doesn't suffer). The owner's earnings yield plus interest/ex dmg EV is quite tasty for a durable business. This is what can be created, therefore this is the intrinsic value.

 

Davita care India was sold recently...they've mentioned trimming some INTL and focusing on only a couple areas this year.

 

There must be a lot of growth capex happening. I wish I knew where it was going. INTL/new opportunities/the new research center/exogenous factors? I don't know. Are they pulling it forward as well? Perhaps to reduce the price paid to take dva private? Was it to induce favorable outcomes by reducing perceived success relating to all the noise over the years? Cheaper buybacks for brk before take over? Just some ideas.

 

 

 

 

 

 

[vince]

Let's look at dva pre DMG, the last full year is 2011. We'll use 2011 d&a as a proxy for steady state capex. Clearly, this is high level.

 

In 2011, D&a is 4% of revenue

 

2007-2011 average of d&a is 31% of OCF

 

In the ttm, on the dialysis side ex dmg, D&A is 6% of revenue and 42.4% of OCF.

 

2% of ttm rev is 208m. 11.4% ttm OCF is 160m. NTM OCF is higher than TTM by 75m fyi.

 

If we take the ttm d&a of 620 and subract 208= 412m. If we subtract 160=460m.

 

The differences are too large.

 

DVA was already on a acquisitive spree pre 2011, 2011 d&a had some non economic A in there. If we assume zero margin expansion and capex costs rising with inflation since 2011, the numbers would be a bit worse but still a whole lot better than current D&A. OTOH, international D&A as a % is greater now than then, presumably it will pay off. The way I see intrinsic value is this, dmg gone, international sold (reducing ev but not eps/fcf), maintain but don't grow usa except organically(rare business, moat doesn't suffer). The owner's earnings yield plus interest/ex dmg EV is quite tasty for a durable business. This is what can be created, therefore this is the intrinsic value.

 

Davita care India was sold recently...they've mentioned trimming some INTL and focusing on only a couple areas this year.

 

There must be a lot of growth capex happening. I wish I knew where it was going. INTL/new opportunities/the new research center/exogenous factors? I don't know. Are they pulling it forward as well? Perhaps to reduce the price paid to take dva private? Was it to induce favorable outcomes by reducing perceived success relating to all the noise over the years? Cheaper buybacks for brk before take over? Just some ideas.

 

So you are agreeing with me to a certain degree?  The large increase without a clear explanation has significantly reduced my confidence in this organization and no longer clears my 15% return hurdle (current free cash flow yield plus growth equals 15% with a constant multiple), whereas not so long ago it had my highest confidence assuming I could purchase it at a 10-12 fcf multiple (or less of course) I dont know if this fits neatly into your analysis but the dmg acquisition step up for tax purposes increased amortization well above any economic requirement. All your posts are very much appreciated.

[MrB]

Let's look at dva pre DMG, the last full year is 2011. We'll use 2011 d&a as a proxy for steady state capex. Clearly, this is high level.

 

In 2011, D&a is 4% of revenue

 

2007-2011 average of d&a is 31% of OCF

 

In the ttm, on the dialysis side ex dmg, D&A is 6% of revenue and 42.4% of OCF.

 

2% of ttm rev is 208m. 11.4% ttm OCF is 160m. NTM OCF is higher than TTM by 75m fyi.

 

If we take the ttm d&a of 620 and subract 208= 412m. If we subtract 160=460m.

 

The differences are too large.

 

DVA was already on a acquisitive spree pre 2011, 2011 d&a had some non economic A in there. If we assume zero margin expansion and capex costs rising with inflation since 2011, the numbers would be a bit worse but still a whole lot better than current D&A. OTOH, international D&A as a % is greater now than then, presumably it will pay off. The way I see intrinsic value is this, dmg gone, international sold (reducing ev but not eps/fcf), maintain but don't grow usa except organically(rare business, moat doesn't suffer). The owner's earnings yield plus interest/ex dmg EV is quite tasty for a durable business. This is what can be created, therefore this is the intrinsic value.

 

Davita care India was sold recently...they've mentioned trimming some INTL and focusing on only a couple areas this year.

 

There must be a lot of growth capex happening. I wish I knew where it was going. INTL/new opportunities/the new research center/exogenous factors? I don't know. Are they pulling it forward as well? Perhaps to reduce the price paid to take dva private? Was it to induce favorable outcomes by reducing perceived success relating to all the noise over the years? Cheaper buybacks for brk before take over? Just some ideas.

 

So you are agreeing with me to a certain degree?  The large increase without a clear explanation has significantly reduced my confidence in this organization and no longer clears my 15% return hurdle (current free cash flow yield plus growth equals 15% with a constant multiple), whereas not so long ago it had my highest confidence assuming I could purchase it at a 10-12 fcf multiple (or less of course) I dont know if this fits neatly into your analysis but the dmg acquisition step up for tax purposes increased amortization well above any economic requirement. All your posts are very much appreciated.

 

Capex (excl acquisitions) from the cash flow statement/Rev shed some light (see attached). Clearly a step up Vince (elevated 1 point avg)  post-DMG v pre-DMG (pre/post 2012). Note: "2018 Norm" in the chart is 800m guided normalized capex/Estimated rev for 2018 $11.4Bn, which assumes their guided 800m includes capex for DMG. Basic point is it seems to support the notion that recent capex is above trend, they've been there before '96-'99 and between management guidance and DMG sale there seems to be a decent probability that capex will reduce going forward.

CAPEX-REV.pdf