DVA – DaVita HealthCare Partners

[mwtorock]

good news - good execution once they acknowledge the problem - another indication of quality management. any thoughts about the next chapter of DVA outside of buyback and debt reduction?

[cubsfan]

good news - good execution once they acknowledge the problem - another indication of quality management. any thoughts about the next chapter of DVA outside of buyback and debt reduction?

 

Not sure what you would need other than this deal.  Just some back of the envelope thinking a good friend of mine just sent:

 

Operating income for the dialysis business: $1.77 B, less interest expense of about $425 (assume no debt reduction)

less taxes (if we assume a 20% rate) you still get NI of about $1 billion.

 

If the market cap is $13 billion after the rise in price today, and take out $4.9 billion in cash plus about a billion on

hand, you are paying $6 billion for a PE of about 7.

 

How good does the next chapter need to be?

[MrB]

I started a position in DVA this afternoon...

 

Sincerely,

VM

 

24% in a month. Not a bad start VM.

[Rasputin]

Hi cubsfan,

 

Their guidance for kidney care 2017 is $1.57 B to $1.6 B.  There will be $100 million headwind in 2018 due to 401k accounting change (they had $100 million benefit in 2017 that will not be repeated in 2018) plus some losses for international kidney care, I'm using $1.45 B OI for 2018. 

 

It's roughly 10 times net income if the 20% tax rate comes  to fruition or 13 times if tax cut act fails.  Still reasonably cheap in my view. 

[flesh]

;D

 

largest position in all accounts.... long ways to go from here.

[Rasputin]

Oops i think we both missed the $155 million net income attributable to minority shareholders (for their JVs)

 

So $1.45 B in EBIT minus $425 million Interest times 0.8 minus $155 million minority interest = $670 million in net income.

 

Use all $4.9 B for share buyback at $68/share = 117 million sh o/s remaining

 

EPS is around $5.7.

 

If they use $2.5 B for debt paydown, $2.4 B for sharebuyback, I get

 

$1.45 B in EBIT minus $300 million interest times 0.8 minus $155 million minority interest = $765 million in net income

 

$2.4 B share buyback at $68/share = 154 million sh o/s remaining.

 

EPS is around $5.

 

So it's about 11 to 13 times earning.  Still reasonably cheap. 

[flesh]

Oops i think we both missed the $155 million net income attributable to minority shareholders (for their JVs)

 

So $1.45 B in EBIT minus $425 million Interest times 0.8 minus $155 million minority interest = $670 million in net income.

 

Use all $4.9 B for share buyback at $68/share = 117 million sh o/s remaining

 

EPS is around $5.7.

 

If they use $2.5 B for debt paydown, $2.4 B for sharebuyback, I get

 

$1.45 B in EBIT minus $300 million interest times 0.8 minus $155 million minority interest = $765 million in net income

 

$2.4 B share buyback at $68/share = 154 million sh o/s remaining.

 

EPS is around $5.

 

So it's about 11 to 13 times earning.  Still reasonably cheap.

 

sprained wrist here...

 

what do you get for 2019? Is it fair to get a market multiple in 19 with less debt from a resilient cannibal?

[cubsfan]

Hi cubsfan,

 

Their guidance for kidney care 2017 is $1.57 B to $1.6 B.  There will be $100 million headwind in 2018 due to 401k accounting change (they had $100 million benefit in 2017 that will not be repeated in 2018) plus some losses for international kidney care, I'm using $1.45 B OI for 2018. 

 

It's roughly 10 times net income if the 20% tax rate comes  to fruition or 13 times if tax cut act fails.  Still reasonably cheap in my view.

 

Thanks for the correction Rasputin - I am easily excited!

[Gregmal]

To satisfy the contrarian in me, are there any reasons anybody sees to take profits here? Not that it's wrong, but I've always been skeptical of unanimous bullishness. I am long fwiw.

[Rasputin]

For me the #1 risk is revenue per treatment.  Can they continue to get $340 ish per treatment?  We know # of treatment will continue to grow.

 

#2 is tax rate.  That $5 eps is predicated on a 20% tax rate.  A 40% tax rate = $3.50 eps

 

I cut roughly 3% of my DVA holding.  I had some higher cost shares that I purchased around $69. 

[sleepydragon]

If they really got $4bn for it - it would be a huge homerun.  Either way the stock is dirt cheap

 

Or maybe the buyer just buy the whole company? Healthcare vertical integrations are in play.  Cvs?

 

lol. got lucky on this one! I have 20% of my portfolio on this name.. :)

now they have 4.9b cash, which is almost half of their current mktcap. They can pay off 1b in debt, and still have 3.9b left for buy back over 2 years. That's 20% of shares outstanding per year.

 

[KCLarkin]

To satisfy the contrarian in me, are there any reasons anybody sees to take profits here? Not that it's wrong, but I've always been skeptical of unanimous bullishness. I am long fwiw.

 

Go on twitter and I think you'll find plenty of bearishness.

https://twitter.com/WallStCynic/with_replies

 

[Gregmal]

For me the #1 risk is revenue per treatment.  Can they continue to get $340 ish per treatment?  We know # of treatment will continue to grow.

 

#2 is tax rate.  That $5 eps is predicated on a 20% tax rate.  A 40% tax rate = $3.50 eps

 

I cut roughly 3% of my DVA holding.  I had some higher cost shares that I purchased around $69.

 

Thanks, and agree. Have seen too many times people overlook big risks simply because a stock is very cheap. DVA to me carries some big ?s but after today appears to be a much cleaner investment. Definitely de-risked quite a bit, but at the same time a little more expensive and predicated on, as you mention, some positive assumptions. IMO it's closer to fairly valued based on what it is "today", but potentially quite cheap if we are correct in some of our year or two out assumptions.

[Gregmal]

If they really got $4bn for it - it would be a huge homerun.  Either way the stock is dirt cheap

 

Or maybe the buyer just buy the whole company? Healthcare vertical integrations are in play.  Cvs?

 

lol. got lucky on this one! I have 20% of my portfolio on this name.. :)

now they have 4.9b cash, which is almost half of their current mktcap. They can pay off 1b in debt, and still have 3.9b left for buy back over 2 years. That's 20% of shares outstanding per year.

 

Wouldn't it be more prudent to look into de-levering a bit more while the share price is elevated? From their latest repurchase announcement the stock is up nearly 30% in a mere couple of months. The current share price is also not very far off prices from a few years ago, before some of these new question marks and regulatory risks entered the picture. Personally, I'd rather see them be more aggressive with the debt pay down and then just use FCF for repurchases while at these levels.

[no_free_lunch]

For what it's worth, reuters is reporting they will use the cash for a combination of share repurchases and debt reduction.  Personally would prefer to see it all go against the debt.

 

DaVita plans to use the proceeds of the sale for stock buybacks and to repay debt.

 

https://www.reuters.com/article/us-davita-m-a-unitedhealth/unitedhealth-to-buy-davita-primary-care-unit-for-4-9-billion-idUSKBN1E01HJ

[sleepydragon]

If they really got $4bn for it - it would be a huge homerun.  Either way the stock is dirt cheap

 

Or maybe the buyer just buy the whole company? Healthcare vertical integrations are in play.  Cvs?

 

lol. got lucky on this one! I have 20% of my portfolio on this name.. :)

now they have 4.9b cash, which is almost half of their current mktcap. They can pay off 1b in debt, and still have 3.9b left for buy back over 2 years. That's 20% of shares outstanding per year.

 

Wouldn't it be more prudent to look into de-levering a bit more while the share price is elevated? From their latest repurchase announcement the stock is up nearly 30% in a mere couple of months. The current share price is also not very far off prices from a few years ago, before some of these new question marks and regulatory risks entered the picture. Personally, I'd rather see them be more aggressive with the debt pay down and then just use FCF for repurchases while at these levels.

 

Impo, I think it will be mistake to pivot the fair value to historical prices. BAC is up 120% from low and they are still buying back. If the management think the stock is worth a lot more, they shall just buy back regardless what happened in the previous 3 months. Deleveraging is also important, but without HCP the remaining business is very cash flow stable.

[Rasputin]

Attached: ML take on this transaction

ML_DEC_6_2017.pdf

[flesh]

plenty of fcf and cash to massively pay off debt and do buy backs... plus tail winds beginning 19'.

 

It's likely they seriously accelerated buy backs before these recent announcements.

 

22% position for me before today.... will not be selling anytime soon.

[Gregmal]

If they really got $4bn for it - it would be a huge homerun.  Either way the stock is dirt cheap

 

Or maybe the buyer just buy the whole company? Healthcare vertical integrations are in play.  Cvs?

 

lol. got lucky on this one! I have 20% of my portfolio on this name.. :)

now they have 4.9b cash, which is almost half of their current mktcap. They can pay off 1b in debt, and still have 3.9b left for buy back over 2 years. That's 20% of shares outstanding per year.

 

Wouldn't it be more prudent to look into de-levering a bit more while the share price is elevated? From their latest repurchase announcement the stock is up nearly 30% in a mere couple of months. The current share price is also not very far off prices from a few years ago, before some of these new question marks and regulatory risks entered the picture. Personally, I'd rather see them be more aggressive with the debt pay down and then just use FCF for repurchases while at these levels.

 

Impo, I think it will be mistake to pivot the fair value to historical prices. BAC is up 120% from low and they are still buying back. If the management think the stock is worth a lot more, they shall just buy back regardless what happened in the previous 3 months. Deleveraging is also important, but without HCP the remaining business is very cash flow stable.

 

I agree regarding historical prices. More so just pointing out that going balls to the wall on a buyback at $55 is a little different than doing it around $70. Rather er on the side on caution and maybe limit buybacks to 10% of shares per year until debt is reduced a bit. At $55? Sure take out every share. $70's? Better safe than sorry.

[DooDiligence]

I am lucky (to have soaked up every word on this thread.)

I believe in the value of Davita's service & understand the risks, thanks to you guys.

 

I'm going to hold what I've got (a 5.6% position before the news & 6.8% after.)

 

Hopefully they'll stick to their knitting from now on.

 

---

 

Do I read this correctly to mean CMS is paying less now to recoup what they deemed as overpayment & that after 2018 Davita may be allowed a small profit on CMS bundled payments? (the last part is implied & not stated.)

 

http://uglymule.com/images/DVA-CMS-Overpayment-Bundling.png

[flesh]

I am lucky (to have soaked up every word on this thread.)

I believe in the value of Davita's service & understand the risks, thanks to you guys.

 

I'm going to hold what I've got (a 5.6% position before the news & 6.8% after.)

 

Hopefully they'll stick to their knitting from now on.

 

---

 

Do I read this correctly to mean CMS is paying less now to recoup what they deemed as overpayment & that after 2018 Davita may be allowed a small profit on CMS bundled payments? (the last part is implied & not stated.)

 

http://uglymule.com/images/DVA-CMS-Overpayment-Bundling.png

 

Yes, now look at 19'

[walkie518]

the transaction makes one think differently about the underlying value of goodwill on the balance sheet

 

DaVita's total equity as of last quarter was $4.8B and the all cash deal is for $4.9B ...say DMG got to where they thought it would, DMG is only 1/3 of sales

 

When I did my initial analysis, what seemed most important was cash-flow stability through cycles rather than the balance sheet because dialysis in the US is a duopoly and DaVita is certainly a franchise business.

 

Now, a lot of goodwill might convert into cash and GAAP earnings will likely take a sharp turn up... there is a lot to learn about what the numbers will look like going forward, and while I don't invest with multiple expansion as a thesis, it seems ever more likely as the ratio of revenue to cash flow spikes before the value added from the announced buyback

 

thoughts?

[ValueMaven]

Very, very interesting point!!!

 

Sincerely,

VM

[MrB]

https://seekingalpha.com/article/4130152-implications-unitedhealths-deal-buy-davita-unit

 

Comment section:

 

"Ranjit Thomas, CFA, Marketplace Contributor

Comments (159) |+ Follow |Send Message

Author’s reply » I spoke to John Penshorn, SVP at UNH who was kind enough to provide me with some additional color on the deal and their thinking. The unit comes with a tax asset that they are valuing at $750 million (at current rates), effectively reducing the purchase price by this amount. This probably represents the amortization of the intangible asset created when DVA bought the unit. UNH believes that they can considerably increase the unit's margins over time(Optum's stated objective is 8-10%), along with increasing its revenues. So now you can get a sense of their thinking around the purchase price. $4Bn of revs to $5Bn...2% margin to 8%...and now you're talking $400 million of operating income, and a purchase price (after deducting the tax asset) that's 16x future taxed earnings, which looks reasonable. I think this is a bit of a stretch, and one can justify almost any acquisition at any price if you assume you can quadruple margins. Also, it's a debatable point whether the value from this potential improvement should flow to the seller rather than be retained by the buyer. John pointed out the strong operational record of the company (which one cannot argue with), and mentioned that acquisitions have played a big part in this."

[ValueMaven]

part of the thesis has always been about Thiry as an operator...now he and the board are purely focused on improving margins, capital allocation, and buying back stock.  It's a pure play once again.  It is very tough to have a negative investment case at this point. 

 

Sincerely,

ValueMaven