by Ethan Roberts | December 12, 2012 11:48 am
When Warren Buffett goes shopping, he looks for long-term value and growth potential.
Maybe that’s what makes his recent expensive buys into kidney dialysis firm DaVita Health Care Partners (NYSE:DVA) so intriguing.
DVA stock could have been purchased for only $65 a little over a year ago … so why has Mr. Buffett been snapping up some 13.6 million shares of DVA — at prices ranging between $100 and $113 — since September 2012?
DaVita is a Denver-based health care company that provides kidney dialysis services for patients with chronic kidney failure, or end-stage renal disease. It operates kidney dialysis centers and provides related lab services in those centers, and in contracted hospitals.
Warren Buffett knows that as the baby boomers age, companies such as DaVita will profit from this group’s increased need for health care services, and dialysis is a type of care that can be ongoing for several years.
The recent purchases by Berkshire Hathaway (NYSE:BRK.A, BRK.B) have increased its total holdings in DVA to $1.5 billion shares, which now propels DVA into its top 10 holdings. This noteworthy group of stocks includes market stalwarts such as Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG) and Walmart (NYSE:WMT).
Although joining such elite company might make DaVita seem like the kid who is slumming at the adult dinner party, DVA actually has been around since 1994, when it was called Total Renal Care. Over the years, DaVita has survived a bankruptcy, a new CEO and a total turnaround, which included the purchase of Gambro Healthcare in 2004, and most recently Health Care Partners, a manager of physician networks. DaVita now employs some 41,000 people throughout its 1,900 dialysis facilities across the U.S., making it the second-largest U.S. provider of dialysis services.
Buffett knows there are some risks involved in purchasing DVA at this point. About 66% of DaVita’s revenue comes from either Medicare or Medicaid. Any cuts to either of those programs as a result of the fiscal cliff could impact negatively on DaVita’s bottom line. However, one of the main reasons for DVA’s recent purchase of Health Care Partners was to expand its own customer base, as well as cutting costs in anticipation of changes to Medicare and Medicaid payment systems.
Davita’s metrics are decent, though not extraordinary. It’s forward P/E ratio is 19.51, expected 5-year PEG ratio is 1.31, and its return on equity is a healthy 22.14%. There is no dividend at this point. It would seem that Buffett is paying high for the future potential of this company, and not necessarily for today’s earnings.
Click to Enlarge While it is foolish to bet against Berkshire, given its tremendous success rate over the years, I would prefer to pay less for Davita than 19 times earnings at its current price of roughly $108. Also, both the weekly RSI and Stochastic Oscillator are currently in decline.
However, the DVA chart seems to indicate that after its recent pullback from $115 to $105, it is beginning to move higher over the short-term. That sets up a dilemma for investors.
Therefore, one might want to dollar cost average into a position right now, or even sell the April 13 covered calls for a little bit of insurance against a possible decline. The $115 strike price currently costs $3.80, a premium of 3.5% to the current stock price. Should the stock rise to $115 and your shares get called away, you still will have made more than 10% between the appreciation and the premium.
Whether your investment style is for the short- or long-term, DaVita seems to be a way to garner healthy returns.
As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.
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