DVA – DaVita HealthCare Partners

[Txvestor]

UNH/Optum is clearly a better operator than Davita. I think Davita took a hands off approach to the partners healthcare division and paid dearly for it. Its a very complex and involved area and not their core competency. This in the end was most certainly a poor purchase, consider thar 6 yrs on you're barely getting the same price you paid for it. I would argue that they got quite lucky with a motivated buyer looking to scale up on the back of past successes. UNH has the talent pool within Optum to wring out some improvements in margins that Davita never could and also to gain some scale advantage, but its unclear to me if they can get to the margins they've penciled into their acquisition basis. I personally think they overpaid and should have negotiated harder or walked, but like I said, they are in acquisition mode and coming off of recent successes in the area.

Remember, there are also synergies with their other businesses, like OptumRx, Data analytics, benefits management etc. Its amazing how much of a one stop shop UNH has become. Each division feeds the other. Its remarkable.

[MrB]

Upgrades to $82 now from Citi and Baird..interesting

[DooDiligence]

I believe this could be my next Edwards Lifesciences (EW)

 

(trying not to let the giddyness induce cog biases.)

[MrB]

H.R.3976 - Access to Marketplace Insurance Act is up to 70 cosponsors now.

 

https://www.congress.gov/bill/115th-congress/house-bill/3976/cosponsors?pageSort=lastToFirst&loclr=cga-bill

[mwtorock]

intrinsic value is close to 90 per share to me. citi's target is still conservative.

[ValueMaven]

How are you getting to $90?

 

Funny that JPM keeps its u/w, yet increases its price-target by $17 (from $51 to $68)

 

How that is allowed i'll never know....

 

Sincerely,

ValueMaven

[DooDiligence]

There's a reason they're called ANALysts.

 

I'm watching this thread instead of price moves / targets.

(constantly gazing at Thiry & Co too.)

[Gregmal]

There's a reason they're called ANALysts.

 

I'm watching this thread instead of price moves / targets.

(constantly gazing at Thiry & Co too.)

 

Or another way I've always looked at it; if the analysts were any good at what they do, they'd be running money, rather than writing book reports.

[DooDiligence]

There's a reason they're called ANALysts.

 

I'm watching this thread instead of price moves / targets.

(constantly gazing at Thiry & Co too.)

 

Or another way I've always looked at it; if the analysts were any good at what they do, they'd be running money, rather than writing book reports.

 

Yep

 

http://uglymule.com/images/peterpoops.gif

[DooDiligence]

Someone at justice has a painful boner for Thiry.

 

https://www.reuters.com/article/us-davita-settlement/davita-pharmacy-unit-settles-u-s-billing-probe-for-63-7-million-idUSKBN1E82UV

 

Is all this legit or are Thiry's political activities being indirectly attacked?

(Why hasn't this been picked up by InfoWars?)

 

;D

 

---

 

https://www.prnewswire.com/news-releases/davita-kidney-care-issues-statement-about-davita-rx-settlement-300571751.html

[ValueMaven]

Whatever the case maybe, DVA is an investment now focused on both capital allocation AND capital distribution.  They need to given investors a reasonable timeline for the buyback.  That said, you are looking at a serious reduction in float over the next 18 - 24 months.

 

Sincerely,

ValueMaven

[cubsfan]

Well with 11.5M shares repurchased YTD as of Nov 7th, looks like they will buy back every share they can if they

stay undervalued. That took $700M, and now they have $1.2B left for buybacks, with some portion of $4.9M

cash from the UHC/HCP deal coming. I think the biggest worry is the stock running away in 2018.

 

From Earnings report:

 

Share repurchases:  As of November 7, 2017 we have repurchased a total of 11,446,307 shares of our common stock during the year for a total of $702 million at an average price of $61.30 per share. During the quarter ended September 30, 2017, we repurchased a total of 1,982,250 shares of our common stock for approximately $117 million at an average price of $59.09 per share. During the nine months ended September 30, 2017, we repurchased a total of 5,556,823 shares of our common stock for $349 million at an average price of $62.77 per share. We have also repurchased 5,889,484 shares of our common stock for $353 million at an average price of $59.92 per share subsequent to September 30, 2017.

 

On October 10, 2017, our Board of Directors approved an additional share repurchase authorization in the amount of approximately $1.253 billion. This recently approved authorization was in addition to the amounts remaining at that time under our Board of Directors' prior share repurchase authorization announced in July 2016. As of November 7, 2017, we have a total of approximately $1.228 billion in outstanding Board repurchase authorizations remaining under our stock repurchase program. These share repurchase authorizations have no expiration dates.

 

 

[ValueMaven]

Very well said!!  BUT you mean $4.9B !!

 

Sincerely,

ValueMaven

[cubsfan]

oops...thanks VM !

[flesh]

Looks like previous posters back of the envelope calcs didn't include the 900m cash on hand plus the 1.2 b ish fcf they will generate q4 17'-q4 18' (5 qtrs). Presumably we should now be looking forward to at least a end of year 18' valuation.

 

At 21% tax and by taking the 4.9b plus 1.2b plus 900m and applying it to debt at 5.5% you get a pretty good number. Applying it all to debt is conservative because it's at a lower rate than the fcf yield whichever time frame your looking at.

Personally, I"d like to see about 4-5b of the 7b go to debt NTM. If debt was reduced by this amount I think the EV would become an afterthought as the debt/equity became perceptibly clean... large debt reduction... rising equity = mkt cap valuation.  No doubt there were considerable buy backs this qtr.

 

Tail winds in 19' on rates, international is supposed to turn positive, and other upside options in the works. It's likely there will be some focused organizational changes leading to some operating leverage, next 1-2 years. Margins were larger pre DMG, not sure how to reconcile that, may be due to over payments. 19' will be the beginning of a clean company with slow/steady net income growth eating itself, no 401k hit. The narrative will change, a year from now we may be considering the implications of faster growth internationally as mgmt gets focused on this area which was already being projected to inflect and the higher rates kick in.

 

17% NTM gain seems fair from here.

 

Or WEB could buy it, or DVA could buy WEB's stake, either would be fun. If WEB was going to buy it, post sale, pre tail winds, would be the time to do so somewhere around mid-high 80's next year. International acceleration could en sue w BRKs vs pubco mandates.

[ValueMaven]

Looks like previous posters back of the envelope calcs didn't include the 900m cash on hand plus the 1.2 b ish fcf they will generate q4 17'-q4 18' (5 qtrs). Presumably we should now be looking forward to at least a end of year 18' valuation.

 

At 21% tax and by taking the 4.9b plus 1.2b plus 900m and applying it to debt at 5.5% you get a pretty good number. Applying it all to debt is conservative because it's at a lower rate than the fcf yield whichever time frame your looking at.

Personally, I"d like to see about 4-5b of the 7b go to debt NTM. If debt was reduced by this amount I think the EV would become an afterthought as the debt/equity became perceptibly clean... large debt reduction... rising equity = mkt cap valuation.  No doubt there were considerable buy backs this qtr.

 

Tail winds in 19' on rates, international is supposed to turn positive, and other upside options in the works. It's likely there will be some focused organizational changes leading to some operating leverage, next 1-2 years. Margins were larger pre DMG, not sure how to reconcile that, may be due to over payments. 19' will be the beginning of a clean company with slow/steady net income growth eating itself, no 401k hit. The narrative will change, a year from now we may be considering the implications of faster growth internationally as mgmt gets focused on this area which was already being projected to inflect and the higher rates kick in.

 

17% NTM gain seems fair from here.

 

Or WEB could buy it, or DVA could buy WEB's stake, either would be fun. If WEB was going to buy it, post sale, pre tail winds, would be the time to do so somewhere around mid-high 80's next year. International acceleration could en sue w BRKs vs pubco mandates.

 

 

WOW!! Very well written flesh!!

 

Sincerely,

ValueMaven

[walkie518]

DVA bonds trading as if the bonds are investment grade, but bonds are rated just under IG (Ba3, B+)

 

Initial coupons around 5.75% w/closest bonds trading at ~$103.  While the 2025 bonds are trading at par (Ba3. B+).

 

Has anyone weighed the cost different between refinancing at IG rates or direct buyback? 

 

Could it be cheaper at this point to use FCF for buybacks since the cost of calling debt then refinancing might be higher and more cash restrictive than simply buying back shares and waiting for the cash pile to accumulate so that the company gets an IG rating?  Outlook should be quite different now?

[UK]

It seems Chanos is still short:

 

https://www.cnbc.com/amp/2017/12/14/cnbc-exclusive-cnbc-transcript-kynikos-associates-founder-and-president-jim-chanos-speaks-with-cnbcs-kelly-evans.html

 

CHANOS: AND SO THIS BILL HAS BEEN RUSHED AND THE QUESTION IS, WHAT ARE THE UNINTENDED CONSEQUENCES? ONE OF THE AREAS THAT WE THINK, IF IT GOES THROUGH, IT'S GOING TO IMPACT THE HEALTH CARE ECONOMY A LOT MORE THAN PEOPLE THINK.

EVANS: HEALTH CARE?

CHANOS: HEALTH CARE.

EVANS: IS THAT BECAUSE THEY'RE REPEALING THE INDIVIDUAL MANDATE?

CHANOS: THE MANDATE, THE BASIC NONDEDUCTIBILITY OF MEDICAL EXPENSES.

EVANS: RIGHT.

CHANOS: AND REALLY, I THINK IT WILL BE, AS PAUL RYAN, I THINK, HAS HINTED AT, IT WILL BE THE OPENING SALVOS THEN IN 18 AND 19 FOR CUTTING ENTITLEMENTS, WHICH IS MEDICARE AND MEDICAID, AGAIN. AND SO THEY'RE GOING AFTER OBAMACARE IN THIS SORT OF BACKDOOR SNEAKY WAY AND WE ACTUALLY HAVE THIS SAYING WITH THE HEALTH CARE STATS, WE THINK WINTER IS COMING. WE THINK WE'RE ABOUT TO SEE DEFLATION.

EVANS: YOU JUST QUOTED NETFLIX, BY THE WAY. OH - NO, THAT WAS HBO "GAME OF THRONES."

CHANOS: NO HBO!

EVANS: I STAND CORRECTED.

CHANOS: COME ON, GET YOUR STREAMING SERVICES RIGHT.

EVANS: YOU KNOW I'M NOT A TRUE VIEWER.

CHANOS: BUT WE THINK THAT WINTER IS COMING IS THE REALITY FOR THE U.S. HEALTH CARE SECTOR. THAT DEFLATION, NOT INFLATION, IS COMING.

EVANS: AND YOU'VE BET AGAINST NAMES LIKE McKESSON, THEN DRUG DISTRIBUTORS.

CHANOS: MALLINCKRODT.

EVANS: I'M SORRY, MALLINCKRODT. NAMES IN THE KIDNEY IT DIALYSIS SPACE, FOR EXAMPLE. ARE THERE ANY OTHERS YOU WOULD EXPAND –

CHANOS: WE'VE BEEN LOOKING AT THE RENT-SEEKING COMPANIES, COMPANIES THAT WE THINK HAVE EXISTED ON THE PERIPHERY OF THE HEALTH CARE ECONOMY THAT BASICALLY HAVE WENT AFTER THESE PRICING SORT OF GAMESMANSHIP MODELS. AND WE THINK THAT THAT'S OVER. WE THINK AS THE PIE SHRINKS, IT'S GOING TO BE TOUGHER AND TOUGHER TO JUSTIFY THE ABILITY OF COMPANIES TO HIKE DRUG PRICES 1,000% OR CHARGE COMMERCIAL INSURERS FIVE TIMES WHAT YOU CHARGE MEDICARE AND MEDICAID IN THE CASE OF DIALYSIS. AND WE THINK THAT THERE'S A NUMBER OF THOSE COMPANIES, SOME HAVE ALREADY DROPPED, SOME HAVEN'T. WE'RE STILL VERY NEGATIVE ON THE PBM SPACE, EXPRESS SCRIPTS CAME OUT AND REAFFIRMED GUIDANCE, RAISED IT THIS MORNING. THERE'S NO REASON FOR INDEPENDENT PBMs TO EXIST, FOR EXAMPLE.

EVANS: DOES THE CVS/AETNA DEAL MAKE SENSE TO YOU?

CHANOS: I THINK THAT'S – EVERYONE'S LOOKING AT IT THE REVERSE WAY THROUGH THE TELESCOPE. WE THINK IT'S THE PBM, CVS CAREMARK THAT IS BUYING THE INSURER BECAUSE THEY'RE WORRIED ABOUT THE PBM MODEL, AND NOT THE OTHER WAY AROUND. NOT AN INSURER GETTING MORE VERTICALLY INTEGRATED. AND SO, I THINK, ONE OF THE THINGS WE'VE TOLD CLIENTS IS THAT AS HEALTH CARE COMPANIES FOUND MORE AND MORE INNOVATIVE WAYS IN WHICH TO GET PAID OVER THE PAST TEN YEARS, WE THINK GOING FORWARD, THE PAYER IS GOING TO FIND MORE AND MORE INNOVATIVE WAYS NOT TO PAY.

 

 

[dontdodebt]

But the dialysis industry isnt overly profitable right? Dosent this mean they (which includes Davita) cant lower prices much? Sure they can lower to some segment of the consumer type (like insurers) but then they just raise prices for medicaid.

 

A business have to have some profitability to exist and this business have to exist. Consumers (medicaid/medicare and insurers) have not much choice then to pay up.

 

If goverment force the prices down so the most cost effective company (davita) loose its profitability people will die, its not rocket science.

[LC]

Thats my thought as well:

 

WE THINK AS THE PIE SHRINKS, IT'S GOING TO BE TOUGHER AND TOUGHER TO JUSTIFY THE ABILITY OF COMPANIES TO HIKE DRUG PRICES 1,000% OR CHARGE COMMERCIAL INSURERS FIVE TIMES WHAT YOU CHARGE MEDICARE AND MEDICAID IN THE CASE OF DIALYSIS

 

Well fine, but then they're going out of business because they lose money on medicare customers. Now who performs dialysis?

[cubsfan]

I like Chanos, but this seems like a terrible stock to short.

A smart management team can absolutely kill you with their options when you generate so much cash:

buybacks, debt reduction, divestures, cost cutting, etc.

And you're shorting the survivor in an oligopoly business.

 

Reminds of when Dave Einhorn presented and shorted Moody's in 2010.

Chanos and Einhorn are really bright and convincing, but they can be too smart for their own good.

 

The only thing DVA can't control is the reimbursement rate.

[Gregmal]

I like Chanos, but this seems like a terrible stock to short.

A smart management team can absolutely kill you with their options when you generate so much cash:

buybacks, debt reduction, divestures, cost cutting, etc.

And you're shorting the survivor in an oligopoly business.

 

Reminds of when Dave Einhorn presented and shorted Moody's in 2010.

Chanos and Einhorn are really bright and convincing, but they can be too smart for their own good.

 

The only thing DVA can't control is the reimbursement rate.

 

Two of the cardinal rules of shorting, at least the way I learned, was never short on valuation alone, or when you need something to change in order for the short to work out. When you look at a lot of the mistakes of guys like Chanos(VRX was hailed as a success but he shorted in like 2011 in the 50's and had to hold for 5 years), Einhorn (AMZN and many more) and Ackman(HLF) a lot of pain could have been avoided simply adhering to this. DVA would fall into the same category. Barring a major regulatory change, this will likely be a bad short.

[sleepydragon]

It's year end. Chanos probably need to do some fund raising so he can have a good Christmas. And it won't hurt for him covering some shorts to harvest some tax credit ::)

[sleepydragon]

I just talked to a friend who used to cover healthcare and used to follow DVA for many years.

It seems to me the thesis can be summarized as following:

1. Insurance companies don't really care much about the payments to dialysis companies. It's not much compared to other stuffs they have to pay. And they know their payment is capped, which is more important to them.

2. Govt has be very careful and will fight an uphill war to lower payment. Because they are not dealing with a single drug company. They are dealing with all these mom and pop shops and low income people who depend on it. A lot of administrative burden for them to do that :)Plus, the profit is not excessive.

3. They are a duopoly. They have a lot of power in controlling their input costs such as paying for the drugs needed.

4. The current payment scheme is written into law for a long time. It's unlikely going to change.

 

 

[DooDiligence]

I just talked to a friend who used to cover healthcare and used to follow DVA for many years.

It seems to me the thesis can be summarized as following:

1. Insurance companies don't really care much about the payments to dialysis companies. It's not much compared to other stuffs they have to pay. And they know their payment is capped, which is more important to them.

2. Govt has be very careful and will fight an uphill war to lower payment. Because they are not dealing with a single drug company. They are dealing with all these mom and pop shops and low income people who depend on it. A lot of administrative burden for them to do that :)Plus, the profit is not excessive.

3. They are a duopoly. They have a lot of power in controlling their input costs such as paying for the drugs needed.

4. The current payment scheme is written into law for a long time. It's unlikely going to change.

 

This.

 

---

 

I do somewhat agree with Chanos' idea concerning Caremark/Aetna.

 

His remark about payers finding more innovative ways NOT to pay seems relevant re: Amazon becoming a drug dealer (never disappoint the customer.)

(maybe he'll find a way to express pessimism on Amazon's aspirations?)  :D