Last month, DaVita Inc. (DVA), a leading provider of dialysis services in the United States to patients suffering from chronic kidney failure (also known as end stage renal disease (ESRD)), announced its financial results for the fourth quarter and fiscal year ended Dec 31, 2009. Earnings estimates for 2010 are on the rise following the release of strong fourth quarter and full year 2009 results.

The company earned $1.06 per share, which was well above the year-ago earnings of 94 cents. For full year 2009, DaVita earned $4.06 per share, in line with the Zacks Consensus Estimate but higher than the year-ago earnings of $3.53. Profits increased 12% from the year-ago quarter on higher revenues. Net operating revenue for fiscal 2009 climbed approximately 8% to $6.11 billion.

As of Dec 31, 2009, DaVita operated or provided administrative services at 1,530 outpatient dialysis centers serving approximately 118,000 patients. The fourth quarter of 2009 saw total treatments at 4,360,638, or 55,198 treatments per day, representing a per day rise of 5.2% over the year-ago quarter. We expect treatment volumes to remain strong and provide opportunities to leverage operational efficiencies.

Positive Earnings Surprises

The company has delivered substantial positive surprises throughout the year. DaVita has performed well during this period with its average earnings surprise being 4.4%. (This implies that the company has surpassed the Zacks Consensus Estimate by 4.4% over the last four quarters.) We expect the company to continue delivering solid results in the coming quarters, generating steady growth and consistent cash flows and stable volume growth.


The company expects operating income in the range of $950 million to $1.20 billion, which represents growth in the range of 1% to 9% from 2009 levels. Furthermore, operating cash flows for 2010 are expected between $675 million and $725 million, against $667 million in 2009.

Earnings Revisions Trend

Based on the company’s strong performance in 2009, several analysts following the stock have revised their estimates upward for the company. Over the past 30 days, seven of the 15 analysts following the stock have raised their earnings estimates for fiscal 2010 with only 3 analysts moving in the opposite direction. On balance, 2010 estimates are up 3 cents (over the last 30 days) with the current Zacks Consensus Estimate being $4.41.

There is a marginal upward bias evident in the movement of earnings estimates for the first quarter of fiscal 2010 as well. While 3 of the 14 analysts following the stock revised their estimates upward, two of them have moved in the opposite direction.

Our Recommendation

We currently have a Neutral recommendation on DaVita, which is supported by the Zacks #3 (‘hold’) Rank. We therefore advise investors to retain the stock both in the short-term (1-3 months) as well as in the long-term (6-12 months).

Although economic weakness, increasing competition in the dialysis industry and the company’s significant government/Medicare payor exposure (which makes the company vulnerable to risks associated with potential changes in the government’s payment policy) are matters of concern, we believe DaVita is weathering the storm relatively well. We expect DaVita to continue performing strongly throughout 2010, generating steady growth and consistent cash flows and stable volume growth. Furthermore, DaVita’s continuous investments in profitable growth opportunities and acquisitions should further its growth.

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