Why BofA Is Upgrading Tenet Healthcare, Downgrading DaVita

DaVita Inc. DVA is focused on dialysis, which means that it is unlikely to get much of a boost from a reacceleration in volumes within health care, of which Tenet Healthcare Corp THC is a key beneficiary, according to BofA Securities.

The Health Care Analyst: Kevin Fischbeck downgraded DaVita from Buy to Neutral and raised the price target from $122 to $127. In a separate note, the analyst upgraded Tenet Healthcare from Neutral to Buy and raised the price target from $45 to $50.

The Health Care Thesis: The Medicare rate environment is positive, and DaVita should continue to exhibit strong cost control, which makes the core story still strong, Fischbeck said in the downgrade note.

Medicare Advantage should “start to deliver” in 2021, the analyst said.

“With rates in MA 10-20% above Medicare fee for service, this is an area of upside for the industry and an investment theme in 2020,” he said. 

Fischbeck said in a separate note that Tenet Healthcare delivered strong performance through the pandemic, including "strong cost control" and a business shift to ambulatory surgery centers, which he said are faster-growing and less capital intensive.

“The growing ASC exposure (42% of the company) positions THC better than its peers to deal with the structural shift in surgeries to the outpatient setting or additional spikes in COVID,” the analyst said.

Even the company’s high leverage should be beneficial for “shareholder returns over the next year,” given the sector tailwinds and business mix shift, according to BofA. 

DVA, THC Price Action: DaVita shares were trading near-flat at $116.48 at last check, while Tenet shares were up 6.9% at $41.67.