Warren Buffett Stocks: DaVita Inc.

Berkshire Hathaway (BRK-B) has one of the largest equity portfolios in the US, totaling more than $360 billion as of the end of the first quarter this year.

Berkshire Hathaway’s portfolio is filled with quality stocks that the company believes are undervalued, have strong long-term competitive advantages, and for the most part, are dividend-paying. Thanks to required disclosures for publicly traded companies, you can see on a quarterly basis what stocks the company owns, and in what quantities.

Using this information, you can essentially benefit from the research the company has done to put its own money at risk. This means you can invest like Buffett, or at least use the list Berkshire owns to narrow down the best ideas.

Note: 13F filing performance is different than fund performance. See how we calculate 13F filing performance here.

As of the end of the first quarter, Berkshire Hathaway owned just over 36 million shares of DaVita Inc. (DVA), for a market value of just under $3 billion. While Berkshire certainly has much larger positions worth much more money, on the basis of the position’s size against that of the float, DaVita is by far the largest position.

In fact, at the end of the first quarter, Berkshire owned a staggering 38% of DaVita’s total shares outstanding. That sort of conviction is difficult to ignore, especially from a legend like Buffett.

In this article, we’ll take a look at the company’s characteristics, and the prospects for buyers of the stock today.

Business Overview

DaVita is a kidney care provider that is focused on improving the quality of life for patients that need dialysis or other kidney care. DaVita seeks to provide access to equitable care for patients at all stages of kidney disease, as well as across settings. That includes slowing the progression of kidney disease, streamlining the transplant process, acute hospital care, and even dialysis at home.

The company has about 200,000 patients at ~2,800 outpatient dialysis centers in the US. In addition, the company operates ~350 outpatient dialysis centers in 11 countries globally. The goal of DaVita is to reduce hospitalizations, improve the mortality rate, and use technology to improve kidney care over time.

DaVita was founded in 1994, employs almost 70,000 people worldwide, generates just under $12 billion in annual revenue, and trades with a market cap of $8.5 billion.

Growth Prospects

We see growth prospects as robust for DaVita in the years to come. The company has grown enormously in recent years, having almost tripled earnings-per-share from 2018 to 2021. The company has seen two primary drivers of strong growth in the past.

First, the company buys back a lot of its own shares, which reduces the denominator of the earnings-per-share equation. We’ll discuss that more in a bit.

Second, DaVita has transformed its business over time, including the sizable divestiture of its DaVita Physicians Group in 2019. That means that the company’s discontinued operations gradually reduced earnings less and less over time, helping to generate strong growth. We do not expect this to be a meaningful tailwind going forward.

Source: Investor Presentation, page 59

However, what we do see as tailwinds going forward are revenue growth, as well as share repurchases. We project 4% to 5% top-line growth in the years to come, stemming from steady patient growth, and gradual price increases.

We see the potential for very strong share repurchase activity driving at least a mid-single-digit tailwind, but in some years it is much more than that, as seen above. In total, we see 12% earnings-per-share growth in the years to come, particularly since this year’s base of earnings is low relative to 2021.

Competitive Advantages & Recession Performance

DaVita offers largely the same care that patients can get at a variety of treatment centers, hospitals, physicians’ offices, etc. However, what DaVita has is enormous scale, a global footprint, and significant technology and analytics spending that helps it drive better outcomes for patients. DaVita is one of the largest players in this niche of healthcare, and we think it stands a very good chance of remaining as such for many years to come.

Recessions should be okay for DaVita considering it offers only medically necessary treatments. Like other healthcare companies that can not only survive, but thrive during recessions, we see DaVita as having reasonably favorable earnings stability during downturns. We don’t believe revenue would be materially impacted by a recession but note the multiple investors would be willing to pay for the stock might.

Valuation & Expected Returns

We place fair value for DaVita at 14 times earnings, which is based on how the stock has been valued in recent years. However, the recent selloff in the stock has the valuation at just 10 times earnings, which is not only well below our estimate of fair value, but is one of the lowest valuations the stock has ever seen. Thus, we believe a significant portion of total returns will be driven by a 6%+ tailwind from a rising earnings multiple.

DaVita does not pay a dividend to shareholders, but when we combine the valuation tailwind and our projected growth rate of 12%, we see outstanding high-teens total return potential annually in the years to come. This puts DaVita firmly into ‘buy’ territory based upon total return potential of nearly 20% annually, as shares trade for just 74% of fair value today.

Final Thoughts

While we’d prefer if DaVita returned cash to shareholders via dividends, we also respect that the company has managed to drastically shrink the float in recent years through share repurchases. We see that as a significant driver of growth in the years ahead, along with modest revenue growth. With Berkshire owning nearly two out of every five shares, we think the case for owning DaVita at current levels is convincing, even without the benefit of a dividend.

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