Selling DaVita HealthCare on Valuation as Reimbursement Squeeze Continues

03/23/2015 5:32 pm EST


Jim Jubak

Founder and Editor,

Shares of one of the largest kidney care companies in the US have popped recently after not doing much of anything for the last four months, so MoneyShow's Jim Jubak is selling his shares as of today, March 23.

I’m selling DaVita HealthCare Partners (DVA) out of my Jubak’s Picks portfolio today. The shares have popped recently after doing less than nothing for the last four months. That’s put them within striking distance of my target price and near the top of the Bollinger Band for the shares at $83.65.

The shares closed at $82.84 today, March 23, giving the portfolio a 30.6% gain on this position since I added it on April 5, 2013 at a split adjusted $62.69.

Shares of DaVita are up 12.5% since February 17. Before this recent spurt they had languished after hitting $78.07 on October 31. On February 17 they traded at $72.78.

The issue with DaVita has never been whether its kidney dialysis services addressed a growing market. The developed world has long faced an epidemic of diabetes. And that epidemic has spread in recent decades to developing economies too.

The question has always been who would pay for those services and at what price. One of the problems for DaVita—created by the epidemic of diabetes—has been constant pressure on prices from insurers and governments attempting to meet growing demand for dialysis and other diabetes treatments without busting the bank. In the United States, for example, commercial insurers are only required to provide for 30 days of dialysis services; after that, the government through Medicare and Medicaid becomes the provider. Patients covered by Medicare and Medicaid make up nearly 90% of DaVita’s dialysis patients. Budget cuts under the sequester, and cuts to reimbursement rates, will continue to squeeze DaVita’s margins in 2015.

The company has done a good job of finding efficiencies to offset that reimbursement pressure, but at a multiple of 21.66 times projected 2015 earnings per share, DaVita trades above its five-year average multiple.

I don't think this is a market where it pays to stretch valuations too far and I’d like to have more cash in this portfolio; I finished 2015 with less than 5% on the sidelines. (And yes, that means I’ve finally finished the calculations for performance by the Jubak’s Picks portfolio for 2014. I’ll be posting those this week.)

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