DaVita Turns in Decent Q4 and Guides Cautiously for 2023

Narrow-moat DaVita DVA turned in fourth-quarter results that were slightly better than we anticipated, allowing it to mildly exceed our 2022 estimates. However, 2023 guidance appears slightly weaker than expected. Those two factors largely offset in our model though, and we expect to maintain our $108 fair value estimate. DaVita shares remain moderately undervalued, in our opinion.

DaVita’s fourth-quarter results appeared slightly better than we anticipated, as COVID-19 mortality challenges appear to be dissipating somewhat in the dialysis market. In the quarter, the company’s sales were roughly flat year over year, including acquisitions. In the U.S., nonacquired treatments declined about 2% year over year while revenue per treatment remained roughly flat. Patient care costs per treatment rose slightly as well, although management highlighted that labor costs challenges started moving in the right direction during the quarter relative to the third quarter. Including a higher tax rate and fixed costs like financing that were not offset by share repurchases as in prior periods, adjusted EPS fell about 23% during the fourth quarter. While obviously weaker than historic trends due to these ongoing challenges, those results were slightly better than we expected.

For 2023, the company’s guidance appears slightly below our expectations on a free cash flow and adjusted EPS basis, but not enough to move the needle on DaVita’s intrinsic value. While the company’s guidance ranges are fairly broad, the company is calling for mid-single-digit declines for 2023 free cash flow and adjusted EPS at the midpoint of its target ranges. Similar to other caregivers, reimbursement- and labor-related challenges appear likely to constrain DaVita’s results in 2023, as well. However, after making some mild adjustments to our expectations for 2023 to account for those factors, our fair value estimate has not changed materially, and shares remain moderately undervalued.