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Favorite Stock: DaVita
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January 17, 2002: 11:11 a.m. ET
Provider of dialysis for kidney disease sufferers is fund director's top pick.
By Staff Writer Alexandra Twin
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NEW YORK (CNN/Money) - For the approximately 7 percent of the population suffering from chronic kidney failure - also known as end-stage renal disease - dialysis is one of the better treatment options. With a new management team and a No. 2 rank in market share, DaVita may be the best bet to deliver this service, according to one money manager.
Second in market cap only to German corporation Fresinius Medical Care, DaVita's new management team, its commitment to sustaining cash flow and its ability to provide a necessary service make it a top pick, according to Tony Rosenthal, director and portfolio manager at TimesSquare Asset Management, which oversees $44.2 billion in institutional accounts.
In its third quarter, the company reported earnings of 31 cents a share, a nickel better than the expectations of a consensus of analysts surveyed by First Call.
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Tony Rosenthal | |
DaVita (DVA: down $0.50 to $23.25, Research, Estimates) is also expected to bring in earnings of 31 cents a share, when it reports fourth-quarter results in late February. The number would represent a 72 percent increase from the 18 cents per share earned a year ago.
"This is a turnaround story, management-wise, and the stock has a lot of upside potential," Rosenthal said.
What do you like about the stock?
This is a condition in which there are few alternatives for providing relief other than transplants, so that's why we're interested in the industry.
As for DaVita, specifically, the company has new management as of 2000. They've been able to cut costs, generate income and build revenue, which is a real challenge in the healthcare industry.
The company will continue to generate strong cash flow, which means it will be able to repurchase stock, make acquisitions if necessary and pay down debt.
Who are its competitors in the sector?
They compete with some hospital-based companies, but the main competitors are Fresinius Medical Care and Gambro, which are both European companies, and then Renal Care Group (RCGI: Research, Estimates), which trades in the United States.
Fresinius has about 26 percent of the market and then DaVita is second with about 14-1/2 percent.
What kind of growth estimates are you looking for over the next year? Do you have a specific stock price in mind?
We believe that the company can grow revenue by about 5 percent to 6 percent in the next year internally and can grow externally by about 1 percent to 2 percent. We think that they can grow operating income by about 10 percent and earnings by about 15 percent. Our 12-month price target on the stock is $28.
What challenges are facing this company? And what kinds of risks do investors in healthcare need to be aware of generally?
One specific concern is that they administer EPO, a hormone product produced by Amgen (AMGN: down $0.53 to $55.16, Research, Estimates). Amgen announced a 3.9 percent increase in the price of this product, so the question will be how can DaVita manage that cost?
Another issue generally with healthcare companies is reimbursement. Should the government -- which, due to Medicare, is a big source of income for many healthcare companies -- change the rate or the amount that they reimburse for this kind of procedure, then that could cost them. But we think the government will actually increase reimbursement in the next few years.
The final issue is an investigative one. Under the old management, there have been several government inquiries into the company's billing practices, both in Florida and Pennsylvania. When the news came out, it hurt the stock, but we think these issues will be resolved without problem and the stock will rise.
In general, healthcare companies probably benefit from an administration (Bush) that is less aggressively pursuing healthcare than the previous administration (Clinton). In addition, that more aggressive approach toward healthcare that was characteristic of the Clinton administration has made these companies up their standards and tow the line a lot more, so they are better managed and in better shape now, which is to the investor's advantage.
Do you or does your company own shares in DaVita?
We hold DaVita in our portfolio. It consists of approximately 1-1/2 percent of our holdings. 
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