DaVita

DaVita reported second-quarter results with 5% revenue growth, 5% adjusted operating profit growth, and 36% adjusted EPS growth, with significant debt-funded share repurchase activity. Management also maintained the 2026 outlook, including adjusted EPS of $14.10-$15.20.

Why it matters: Shares fell about 7% in after-hours trading on Aug. 4 on this news, which we believe reflects investors' high expectations that were not satisfied by the firm merely maintaining its 2026 outlook, similar to its key peer, Fresenius Medical Care, on Aug 3. More positively than Fresenius, DaVita stole a bit of US market share by growing organic treatments by 0.3%, while Fresenius reported a same-market treatment decline of 0.9% due to not converting referrals into scheduled treatments, as Fresenius clinics juggled other priorities. However, both companies highlighted that they will face some headwinds in the second half of 2026 due to declining individual exchange coverage and lower phosphate binder revenue in the US, which kept them cautious on their 2026 outlooks despite strong performance so far this year.

The bottom line: While our near- and long-term expectations have not materially changed, we are raising our fair value estimate for DaVita to $165 per share from $156 previously, primarily to reflect cash flows generated since our last valuation update. DaVita shares look likely to remain moderately overvalued, though. Our fair value estimate for DaVita continues to reflect mid-single-digit growth in adjusted operating profit and free cash flow during the next five years, which is similar to management's 3%-7% adjusted operating profit growth target in the long run. Also, we continue to believe DaVita operates with a narrow moat surrounding its top-tier network of dialysis service providers, which is related to its reputation-related intangible assets and efficient scale in US services.

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We are boosting our fair value estimate to $165 per share from $156 per share primarily to reflect cash flows generated since our last valuation update.

Through 2030, we still expect sales to grow 6% compounded annually. This outlook is driven primarily by the US business growing at a mid-single-digit pace, as that business continues to rebound following covid-related challenges in 2022-23. Internationally, we expect a more robust growth rate to reflect the long runway in both the global dialysis clinic landscape and DaVita's strategy to expand that business after recent acquisitions. Given the relatively small size of those operations, though, the higher growth of the international business doesn't move the needle much on DaVita's total revenue growth.

Free cash flows may have a tough time growing significantly faster than revenue during the next five years, as the firm invests more in its working capital base. However, we expect share repurchases and other nonoperating items to help adjusted earnings per share grow over 20%, or well beyond its revenue and free cash flow growth rates. Investors should note that we continue to take a largely value-neutral approach to our long-term share-repurchase assumptions, especially since shares are now trading above fair value, in our opinion.

We assign DaVita a narrow Morningstar Economic Moat Rating, supported by its leading position in dialysis services, where it operates about 35% of US clinics and maintains a global presence. We believe the company’s competitive advantages in this business should help it generate returns on invested capital, including goodwill, moderately above capital costs during the next 10 years, which informs our narrow moat rating.

At DaVita, we see intangible assets and efficient scale advantages as the firm's moat sources.

Intangible Assets

DaVita has built a large network of dialysis clinics in the US over several decades, based primarily on its extensive physician relationships and convenient locations, which positively influence demand for its services.

Based on our calculations, DaVita has referral relationships with over half of the practicing nephrologists in the US. Also, some referring physicians have ownership stakes in the clinics that DaVita operates. DaVita recently reported that nearly 30% of its US dialysis revenue comes from such joint-venture arrangements. We believe these arrangements give partial owners an incentive to refer patients to those specific clinics, which is a significant intangible asset, in our opinion. Also, each clinic employs a medical director, consisting of a nephrologist or nephrologist group, who can refer to dialysis clinics and receive compensation from DaVita for providing medical program guidance and other administrative functions for a contractual period of 10 years with noncompete clauses associated with those arrangements. While DaVita denies that any referring physician is required to send patients to a specific clinic, we believe that natural financial incentives, perceived quality based on influence at certain clinics, and other loyalties can influence a physician’s clinic recommendation when determining a patient’s care plan.

DaVita operates about 35% of all US dialysis clinics, and its widespread locations can offer patients convenience that is particularly important when considering where to regularly receive these typically time-intensive treatments. In-clinic dialysis patients receive treatments for three to four hours per day, three times per week for the rest of their lives or until they get a successful kidney transplant. Considering that grueling schedule for an already very sick patient, additional commute time to and from the treatment facility remains a major point of concern when physicians and patients determine individual treatment plans. Therefore, DaVita takes care to locate its clinics in convenient areas to serve dialysis patients efficiently. Also, we see a mild switching cost related to convenient locations because once a patient is slotted into a shift at a high-quality and convenient dialysis center, patients would have little incentive to leave that facility or care team, although we see this switching cost as only supportive of the moat rather than a moat source for the company.

Efficient Scale

Dialysis demand is mature with a low need to add more clinics to better serve the US marketplace, particularly as at-home options that are managed by existing clinics can fill voids as patient volume grows at a slow pace.

Adding dialysis clinic capacity probably would not be deemed as a profitable venture by new entrants in this market, which is relatively small from a dialysis patient perspective.

Dialysis services are relatively commodified with significant regulation and oversight on pricing by the US government, which takes over payments after 33 months of dialysis or sooner, depending on commercial insurance status at roughly breakeven levels for the clinics. This dynamic effectively limits returns that dialysis service providers can generate, which can constrain new entrant desire to target this market, as well.

Dialysis demand is not affected materially by price, meaning that it is inelastic.

The clinic networks of DaVita and Fresenius have high sunk costs associated with them, including the specialized facilities, dialysis equipment, and the brand identity of existing clinics. New entrants may find it difficult to justify making new investments in geographic areas that these firms already serve well.

Lastly, historical precedent suggests little potential for competitive entries or exits, suggesting that efficient scale is present.

Despite recent covid mortality challenges and obesity drug expansion, the ESRD patient population may grow at a healthy rate in the US and around the globe in the long run, which should benefit DaVita.

DaVita enjoys top-tier status in the essential dialysis business, and we do not expect competitive dynamics to negatively affect that attractive position anytime soon.

While growing at-home care could change its business model a bit, DaVita could also benefit from ESRD patients being able to continue working and staying on commercial insurance plans.

Potential US healthcare policy changes could reduce industry profitability if insurance coverage shifts away from employer-based plans or if Medicare reimbursement rates don't increase substantially.

DaVita's high financial leverage creates significant obligations that could weigh on the stock, especially if profitability declines.

If technology is introduced that makes dialysis unnecessary in the long run, demand for DaVita's services may decline permanently.