Citi Initiates DaVita Healthcare At Neutral: 'Living DaVita Loca?'

With the consensus EBIT forecast for FY16E and the estimate at the upper end of the guidance range, Citi’s Patrick Wood believes there is limited upside risk to the expectations, despite Davita Inc DVA having a history of conservatism.

Wood initiated coverage of the company with a Neutral rating and price target of $71.

Higher Risk

“DaVita is a high quality company with a similar EPS CAGR to FMC Corp FMC, cash conversion, and ROIC improvement,” the analyst mentioned.

However, Wood prefers FMC, since there are lower expected risk in this company’s front-weighted growth.

Related Link: Barclays Initiates Protagonist At Overweight

Volume Growth

The analyst believes that DaVita has a long pipeline of 6,500–8,500 new dialysis patients every year, which is expected to drive robust volume growth of 4–5 percent in the Kidney Care business.

On the other hand, the Medicare Advantage enrollment data indicates that the company’s Medical Group is likely to see 4 percent capitated patient growth.

Total group volume is expected to grow 5 percent, given that it is mostly attractive and defensive in the current markets.

Risk Profile

However, Wood pointed out that DaVita’s risk profile appears higher than that for FMC, despite the similar forward earnings growth rates.

“FMC now controls the distribution of 2 out of 3 of the most important dialysis drugs (ESAs), probably leaving DaVita at a cost disadvantage,” the analyst noted.

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