DVA - DaVita: A Strong Earnings Beat Better Free Cash Flow Outlook Upgrading To Buy

2023-05-09 17:58:35 ET

Summary

• The Healthcare sector has seen better price action in the last few months after a steep drop early in 2023.
• DaVita was the top-performing S&P 500 stock on Tuesday as investors reacted favorably to its strong Q1 beat and raise.
• I see fair value more than 10% higher from Tuesday's close.
• With the stock breaking a downtrend, the technicals also align with a buy rating.

After a stunning string of weekly losses in the Healthcare sector to start 2023, relative price action has moderated. The group has actually fared better on an absolute basis as some defensive sectors catch a bid. Today, the group's leading name was DaVita ( DVA ).

The kidney dialysis services company posted much better than expected first-quarter earnings and raised its profit outlook. I continue to like the valuation, and the chart has improved. I am upgrading DVA to a buy.

Healthcare Equities Seeing Better Relative Strength Since February

According to Bank of America Global Research, DVA is a leading dialysis provider in the United States. The company operates over 2,700 outpatient clinics in the US and serves over 200,000 patients. DaVita also operates in countries outside of the US.

The Denver-based $8.1 billion market cap Healthcare Providers & Services industry company within the Healthcare sector trades at a near-market 17.9 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal.

DVA was one of the leading stocks on Tuesday, May 9 after it announced an impressive Q1 . The company topped analysts’ earnings estimates and raised guidance. I was particularly impressed with the free cash flow raise. While DVA now sees 2023 operating income 3% higher from its prior outlook (and 5% above consensus), free cash flow is now expected to be $100 million higher.

That builds on what is already forecast to be a high free cash flow yield in the current and out year. Overall, DVA posted $1.58 of EPS, beating estimates by $0.36 with a 1.8% year-over-year top-line growth rate. DVA reported a per day increase of 0.9% of total U.S. dialysis treatments in Q1. Going forward, adjusted diluted EPS is seen in the $6.20 to $7.30 range, a raise from the prior $5.45 to $6.95 range (consensus is just $6.32).

On valuation , analysts at BofA see earnings rising by a solid double-digit clip this year and through 2024. Per-share profits are then expected to rise sharply in 2025 as the macro environment improves. The Bloomberg consensus forecast is not quite as sanguine as BofA, but earnings growth is still forecast to be robust (after the Q1 results, I'd expect earnings upgrades soon that would lift the consensus amounts). Don’t expect dividends in the near term, but DVA sports strong free cash flow and is expected to continue to grow FCF over the coming years.

DaVita: Earnings, Valuation, Free Cash Flow Forecasts

Given the high growth, I assert a fair P/E is between its 5-year average multiple and the sector median. If we assume a conservative $6.40 of NTM earnings and an 18 P/E, then shares should be near $115.

DVA: Attractive Valuation Given High EPS Growth Through 2025

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q3 2023 earnings date of Monday, July 31. Before that, the management team is speaking at the Bank of America Securities Global Healthcare Conference 2023 from May 9 to 11 which could bring about some news on the firm’s products. Volatility could also strike at DVA’s upcoming shareholder meeting on Tuesday, June 6.

Corporate Event Risk Calendar

The Technical Take

Earlier this year , I had outlined a bullish technical situation based on a rally above its 200-day moving average. Indeed, that happened ahead of earnings earlier this week. Notice in the chart below that DVA has now rallied to its Q4 2022 high at $100. I like how the rally on Tuesday came on strong volume and the RSI momentum indicator at the top of the chart confirms the price action.

With the bulls back in control after a trendline break late in the first quarter, I like the technical outlook going forward. Of course, the earnings-related gap could always get filled, but I would be a buyer on that weakness. For now, I see the next stop being the $125 high from a little more than a year ago, and the all-time highs could eventually be in play.

DVA: Bullish Trend Break, Shares Gap To $100 On Strong RSI & Volume

The Bottom Line

With an improved technical situation and a still-appealing valuation, I am upgrading DVA to a buy. Unfortunately, there have already been big gains following a technical breakout last month. Still, I see shares undervalued following Tuesday’s beat and raise.

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