Davita: A Socially-Responsible Investment

By Will Ashworth | April 22, 2010 AAA

Chronic kidney disease dialysis service provider DaVita (NYSE:DVA) and its 118,000 patients receiving kidney care know how serious this disease is. The Denver-based company understands that its success or failure treating patients lies in the hands and minds of dedicated employees. Long ago, it realized a democratic workplace was the best environment for employees to perform their jobs in an exceptional manner. This decision has paid financial dividends as well as human resource accolades. Recently, it was named by WorldBlu - an Austin-based nonprofit dedicated to organizational democracy - as one of the 44 most democratic workplaces worldwide.

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They're Hiring
Any company hiring today is likely in good financial health. DaVita's career site lists 1,222 full and part-time positions available. That's 3.6% of its overall workforce of 34,000. Naturally, some of these openings are due to staff turnover, but the rest are new jobs due to an increasing number of patients. Management's outlook for 2010 calls for operating income between $950 million and $1.02 billion. With an operating margin of 15.4%, it should generate revenues of $6.4 billion in 2010 from approximately 123,800 patients, an increase of 4.9% year-over-year. It's not massive growth, but it's enough, given its ability to generate cash.

Lots of Cash
DaVita finished 2009 with free cash flow of $485 million or 8% of revenues. It currently has $5.43 a share in cash with its stock trading at 12.1-times cash. The table below lists some of its specialized health services peer group. With the exception of MDS, DaVita's stock is trading at the most reasonable valuation among them. But most of its cash comes from the sale of its Analytical Technologies and Pharma Services divisions for $650 million and $45 million respectively. It will now focus on its Nordion division, which specializes in medical imaging, with revenues about one-fifth its former size. Therefore, at least in terms of cash, DaVita easily is the winner. (Cash in the bank is what every company strives to achieve. Find out how to determine how much a company is generating and keeping, in Free Cash Flow Yield: The Best Fundamental Indicator.)

DaVita and Peer Group
Company Market Cap Price/Cash
DaVita (NYSE:DVA) $6.8 billion 12.1
Mednax (NYSE:MD) $2.7 billion 85.4
Healthsouth (NYSE:HLS) $1.9 billion 22.4
Psychiatric Solutions (Nasdaq:PSYS) $1.8 billion 264.8
MDS (NYSE:MDZ) $1.1 billion 1.22

Steady Stock
In the past five years, DaVita stock averaged annual returns of 9.8%, 860 basis points better than the S&P 500. Over a 10-year period, it beat the index by an impressive 42.4% annually. Year-to-date it's up 11.7%, again outpacing the S&P 500. Only in 2007 did it underperform the index. How did it do it? CEO Kent Thiry transformed the company into a democratic, caring workplace. It might not seem like much but when he took over the company in 1999, it was ready for the healthcare scrap heap. Now it's the only healthcare company on the WorldBlu list for the third consecutive year. A lot's changed since then. Revenues have grown from $1 billion to over $6 billion, the number of dialysis locations from 450 to 1,800 and its market cap from $150 million to $6 billion. By keeping employees engaged the company has been able to grab 30% market share with more to come.

Odds and Ends
In addition to WorldBlu, it's been given several other accolades from Training Magazine, Fortune and Modern Healthcare. According to Fast Company, employees have a vote on most issues and each clinic establishes its own guidelines rather than receiving direction from the head office. It sounds empowering. Ironically, one of the other companies on WorldBlu's list, Glassdoor.com, has a number of unflattering reviews from current and former employees. It's certainly something to keep an eye on. Sometimes a reputation gained is tough to lose. (Find out why some companies thrive while others flounder, see Economic Moats: A Successful Company's Best Defense.)

The Bottom Line
There's a lot to like about DaVita. Having said that, healthcare is an extremely volatile sector of the economy. You need to be prepared for the inevitable changes coming because of healthcare reform. In terms of its current valuation, I see it trading at or slightly below its historical norms. If you're a long-term investor, there should be no problem here. Buy away.

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