XLV - DaVita: Solid Valuation And Cash Flow Price Recovering After SCOTUS Ruling

Summary

• The Health Care sector has been a source of relative safety during this tumultuous September.
• While some large-caps in the space are catching bids, one smaller health care services and facilities company is sharply lower in 2022.
• Earnings are expected to improve, but there's work to do on its chart.

Positive drug news recently out of Biogen ( BIIB ) and Eli Lilly ( LLY ) helped send those stocks back to near 52-week highs this week. There are plenty of positive fundamental and technical tailwinds for the defensive sector, but not all of its industries are created equal.

Health Care Providers and Medical Care Facilities are two struggling areas. One S&P 500-listed stock in the space features an attractive valuation, but a June Supreme Court decision dinged this year's profits. Is it a value now? And what does the chart say?

Year-To-Date Returns: Green Spots In Health Care. Medical Care Equities Down Big.

According to Bank of America Global Research, DaVita Inc. ( DVA ) is a leading dialysis provider in the United States. It provides kidney dialysis services for patients suffering from chronic kidney failure. The company operates over 2,700 outpatient clinics in the U.S. and serves over 200,000 patients. DaVita also operates in countries outside of the US. The company features modest long-term growth despite earnings volatility in recent years and in 2023. It is also less levered to its industry's operating cycle than some competitors, though BofA highlights regulatory risks to commercial pricing. For background, the Marietta vs. DaVita ruling by the SCOTUS in June sided with the health plan, which allowed self-insured plans to exclude certain dialysis providers. BofA believes that should result in a 15% revenue cut, slashing the earnings picture.

Upside risks include better insurance plan volumes with more commercial demand along with more favorable reimbursement rates. Moreover, a faster shift toward Medicare Advantage recipients' usage of DaVita's services would promote improved earnings.

The Colorado-based $7.6 billion market cap Health Care Providers trades at a low 10.6 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal .

On earnings and valuation, per-share profits are solidly in the black, but the growth rate is volatile. This past June's negative SCOTUS ruling results in a much lower earnings figure for 2022. The upshot is EPS is seen as rebounding sharply next year and at a still-solid pace in 2024. While its EV/EBITDA multiple does not scream cheap, strong free cash flow makes me lean toward the inexpensive side on DaVita's valuation.

DVA Earnings, Valuation, And Free Cash Flow Forecasts

Looking ahead, Wall Street Horizon's corporate event data show an unconfirmed Q3 earnings date of Thursday, October 27. The calendar is light aside from that. Ahead of its quarterly report, DVA beat earnings estimates back in July.

Corporate Event Calendar

The Technical Take

DVA has managed to hang on to its June lows so far, as the broad market threatens to break down below those lows. You can see the volume spike around the unfavorable SCOTUS decision back then, but also notice how the bulls stepped up to bring shares sharply higher the next day. That $75 price level is critical to hold.

Unfortunately for the bulls, though, there's clear resistance in the mid-$90s. To break the downtrend, that level should be recaptured.

DVA Shares Bounce From A Bad SCOTUS Ruling, But Work For The Bulls To Do

The Bottom Line

The valuation and profitability after this year look attractive to me with DaVita, but the stock must hold its June low and/or climb above the summertime range-highs. It's in no-man's land at the moment. Being long here is fine, but a stop under $75 is the prudent play.

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