DaVita Earnings: Good Start to Year Boosts 2023 Outlook

Narrow-moat DaVita DVA turned in first-quarter results that exceeded expectations, and management increased its guidance for the full year. At first glance, we remain comfortable with our $108 fair value estimate, and shares continue to trade below that valuation

In the first quarter, DaVita fared better than anticipated primarily because external challenges eased a little. For example, COVID-19 mortality challenges appear to be dissipating somewhat in the dialysis market as the pandemic turns into an endemic situation. With that easing, sales in the first quarter grew 2% year over year, including U.S. treatments per day increasing 1% year over year while revenue per treatment grew 1%. Also, while patient care costs per treatment grew 2% year over year, management highlighted its contract labor costs were lower than anticipated, similar to trends noted by other providers in the quarter. Overall, adjusted EPS only declined about 4% year over year to $1.58, which was well above FactSet consensus of $1.18, and that outperformance appears to be driving shares higher after this announcement.

Additionally on these good first-quarter trends that included less severe labor challenges than feared, DaVita increased its guidance for the full year. Now, management expects a low-single-digit increase in adjusted EPS at the midpoint of its new guidance range of $6.20-$7.30, which may be possible especially as comparable periods get easier in the second half of the year. Also, the company added $100 million of expected free cash flow to both ends of its annual target to $750 million-$1.0 billion for 2023. Overall, we appreciate that DaVita’s near-term challenges appear to be easing a bit after a tough pandemic period. And while we’ve increased our near-term assumptions slightly, our fair value estimate has not changed materially, and shares still trade at a slight discount to fair value, in our opinion.