Warren Buffett, the undisputed guru of value investing and one of the world's richest people, has developed a cult-like following among the global investing community. A proponent of investing in businesses that are trading below their intrinsic values with a wide competitive moat, Buffett's investing style requires immense patience, but his own performance seems to confirm that it's a proven method for amassing considerable wealth over time.
Popular Buffett stocks such as Apple (AAPL), Coca-Cola (KO), and American Express (AXP) are well-known. However, in this piece, we will train our focus on a Warren Buffett stock that has outperformed all of those names this year - and still seems to be undervalued at current prices.
About DaVita Stock
Founded in 1979, DaVita (DVA) is a leading provider of kidney care services in the United States and internationally. The company operates dialysis clinics, providing essential treatments to patients with chronic kidney disease. The company operates over 2,700 outpatient clinics in the U.S., and serves over 200,000 patients, with international operations, as well. DVA's market cap currently stands at $14.23 billion.
Up 55.4% on a YTD basis, DVA stock has not only outperformed the S&P 500 Index ($SPX), but it's also the second-best performing Buffett stock this year so far.
As the No. 12 holding in Berkshire Hathaway's (BRK.B) equity portfolio, DaVita accounts for only 1.9% of Buffett's overall holdings. However, Berkshire holds a stake worth 43% of DVA, making Buffett the biggest owner of DaVita by a wide margin.
So, what have been the drivers behind the stock's stark outperformance this year? Let's have a closer look.
Robust Fundamentals
In DaVita's early August earnings report for the second quarter, revenues came in at $3.2 billion, up 6.3% from the previous year as core dialysis patient service revenues improved 5.9%. Adjusted earnings per share (EPS) climbed by 24.5% on a YoY basis to $2.59, just short of the consensus estimate.
Net cash from operating activities for the first six months of 2024 stood at $664.01 million, as the company reported a positive free cash flow of $654 million in Q2, reversing outflows of $327 million in the year-ago period.
Overall, DaVita closed the quarter with a cash balance of $416.5 million, up from $380.1 million at the start of the year. During the quarter, DVA repurchased 2.7 million shares of common stock.
For the full year, DaVita hiked its adjusted operating income guidance by $35 million at the midpoint to a new range between $1.91 billion and $2.01 billion. On average, analysts are predicting that Davita will report forward earnings growth at a rate of 22.32%, roughly double the healthcare sector median.
Growth Drivers
DaVita is positioned to benefit significantly from the expanding global kidney treatment market. Valued at $32 billion in 2022, this niche is expected to grow to $48 billion by 2032, representing a CAGR of 4% from 2023 to 2032. DaVita holds a dominant 36% share of the U.S. kidney dialysis market, leaving it poised to benefit from this growth.
In addition to its domestic operations, DaVita's expansion into the Latin American market is set to drive revenue growth and strengthen its international presence. The company's focus on expanding its renal care operations in Brazil, Colombia, Ecuador, and Chile will help diversify its revenue base, which currently relies heavily on U.S. dialysis patients (89% of total revenue, as of FY 2023).
DaVita's partnership with Fresenius Medical Care (FMS) has also been a key driver of value, as Fresenius not only operates its renal systems but also manufactures them, helping to reduce supply costs for DaVita. To further solidify its position in Latin America, DaVita completed a $300 million acquisition of four dialysis-related assets from Fresenius earlier this year. This deal added 154 dialysis clinics, 7,100 employees, and approximately 30,000 dialysis patients to DaVita’s existing operations. The acquisition is expected to boost DaVita’s reach in the region, adding 60,000 kidney care patients and 270 additional clinics.
Is DaVita Stock Undervalued?
Despite DVA's stellar price action, the stock still looks reasonably valued at current levels. Priced at 16.42 times forward adjusted earnings and 1.07 times forward sales, DaVita trades at a significant discount to median healthcare sector valuations.
Meanwhile, Wall Street is largely overlooking this Buffett value pick, which has a consensus rating of “Hold” among the 8 analysts in coverage. The mean price target is $155.86, slightly below Friday's close. The Street-high target is $175, implying expected upside of 7.3%.
