DaVita: Strong Valuation and Cash Flow, Price Recovery Post SCOTUS Decision (NYSE: DVA)

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Positive news on recently released drugs from Biogen (BIIB) and Eli Lilly (LLY) helped push these stocks back to near 52-week highs this week. There are a lot of positive fundamental and technical tailwinds for the defensive sector, but not all its industries are created equal.

Health care providers and medical care facilities are two struggling areas. An S&P 500-listed stock in the space has an attractive valuation, but a June Supreme Court decision weighed on earnings this year. Is it worth now? And what does the table say?

Year-to-date returns: green dots in healthcare. Healthcare stocks down.

Year-to-date returns: green dots in healthcare.  Medical care Equites Down Big.

Finviz

According to Bank of America Global Research, DaVita Inc. (NYSE: DVA) is a leading dialysis provider in the United States. It offers kidney dialysis services to patients with chronic kidney disease. The company operates more than 2,700 outpatient clinics in the United States and serves more than 200,000 patients. DaVita also operates in countries outside of the United States. The company is showing modest long-term growth despite earnings volatility in recent years and into 2023. It is also less dependent on the operating cycle of its industry than some competitors, although BofA stresses regulatory risks related to trading prices. For context, SCOTUS’ Marietta v. DaVita decision in June sided with the health plan, which allowed self-insured plans to exclude certain dialysis providers. BofA believes this should lead to a 15% reduction in revenue, reducing the profit picture.

Upside risks include better insurance plan volumes with greater business demand as well as more favorable reimbursement rates. In addition, a faster shift to use of DaVita services by Medicare Advantage beneficiaries would support improved earnings.

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

As for earnings and valuation, earnings per share are solidly in the black, but the growth rate is volatile. The negative SCOTUS decision last June translates to a much weaker earnings figure for 2022. The result is that EPS is seen to rebound strongly next year and at a still solid pace in 2024. Although its EV/ EBITDA doesn’t scream cheap, strong free cash flow makes me lean towards the cheap side of DaVita’s valuation.

DVA Earnings, Valuation and Free Cash Flow Forecasts

DVA: results, valuation, free cash flow forecasts

BofA Global Search

Looking ahead, Corporate Events data from Wall Street Horizon shows an unconfirmed third-quarter earnings date of Thursday, October 27. The schedule is light apart from that. Ahead of its quarterly report, DVA beat earnings estimates in July.

Corporate events calendar

Corporate Events Calendar

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The technical grip

DVA has managed to hold on to its June lows so far, as the broader market threatens to crash below these lows. You can see the spike in volume around SCOTUS’ negative move at the time, but also notice how the bulls escalated to take stocks higher the next day. This $75 price level is essential to maintain.

Unfortunately for the bulls, however, there is clear resistance midway through $90. To break the downtrend, this level should be retaken.

DVA stocks rebound from poor SCOTUS decision, but work for bulls

DVA: Stocks rebound from poor SCOTUS decision, but work for bulls to do

Stockcharts.com

The essential

Valuation and profitability after this year look attractive to me with DaVita, but the stock needs to maintain its June low and/or climb above the summer range highs. It’s in no man’s land right now. Going long here is fine, but a stop below $75 is safe play.

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