DaVita's (DVA) Q3 Earnings Lag Estimates, Kidney Care Down

DaVita Inc (NYSE:DVA) reported third-quarter 2018 adjusted operating earnings per share of 56 cents, which missed the Zacks Consensus Estimate by 37.1%. The figure also declined 34.1% on a year-over-year basis.

Total revenues in the quarter improved 3% year over year to $2.85 billion, also missing the Zacks Consensus Estimate of $2.92 billion.

Per management, DaVita incurred additional expenses in the reported quarter which significantly impacted earnings.

These expenses include $45 million of advocacy costs in countering union policy efforts and equity compensation of $23 million. Additionally, the company recognized restructuring charges of $11 million and asset impairment charges of $6 million in the reported quarter.

Over the past year, the Zacks Rank #3 (Hold) stock has rallied 40% compared with the industry’s 11% rise. The current level is also higher than the S&P 500 index’s increase of 6.3%.

Business Details

Net dialysis and related lab patient service revenues in the third quarter totaled $2.66 billion, up 8.9% on a year-over-year basis. Other revenues were $188.6 million, down a significant 41.6% year over year.

Per management, in the quarter under review, the company provided dialysis services to a total of 226,000 patients at 2,876 outpatient dialysis centers. Of these 2,625 centers were located in the United States and 251 centers were in 10 countries outside. Moreover, DaVita opened a total of 47 new dialysis centers and acquired three dialysis centers in the United States.

However, DaVita posted lackluster results in the Kidney Care business in the third quarter. Net consolidated revenues at the segment totaled $2.85 billion, down 1.4% year over year. Consolidated Kidney Care operating income was $289 million, down 34% from the year-ago quarter. As an operating division of the company, DaVita Kidney Care focuses on setting worldwide standards for clinical, social and operational practices in kidney care.

U.S. dialysis and related lab services revenues grossed $2.58 billion, down 0.4% from the prior-year quarter. International dialysis patient service and other revenues totaled $113 million, up 5.6% year over year.

For investors’ notice, the company is on track to divest the major segment — DaVita Medical Group (DMG) — to Optum, a subsidiary of UnitedHealth Group Inc (NYSE:UNH). This transaction is subject to regulatory approvals and other customary closing conditions. The results of DMG business’ operations have been reported as discontinued.

Share Repurchase Update

During the third quarter, DaVita repurchased a total of 4.8 million shares for approximately $344 million, at an average price of $70.86 a share.

As of Nov 5, 2018, DaVita has repurchased 16.8 million shares for $1.15 billion on a year-to-date basis.

Financial Condition

DaVita exited the third quarter with operating cash flow of $362 million and free cash flow of $226 million.

Guidance

For 2018, DaVita expects Kidney Care adjusted consolidated operating income in the range of $1.5-$1.53 billion, lower than the earlier band of $1.5-$1.6 billion, which excluded advocacy costs.

Operating cash flow in 2018 is anticipated within $1.4-$1.6 billion.

Effective income tax rate on income from continuing operations attributable to the company is projected between 30.5% and 31.5% for 2018.

Our Take

DaVita ended the third quarter on a dull note, with earnings and revenues missing the consensus mark. Earnings declined year over year. The company’s Kidney Care revenues also inched down. In fact, dialysis services in the United States saw a relatively soft quarter. Notably, DaVita incurred significant advocacy and impairment costs in the quarter, which negatively impacted results. Adoption of executive retirement policy also led to additional expenses for the company. Sluggishness in Other business has been another headwind. A narrowed guidance for 2018 adds to the woes.

On the brighter side, DaVita’s international dialysis revenues rose year over year in the quarter. The company is on track to acquire an increasing number of dialysis centers in the United States. Additionally, the recent win against the union-backed ballot in California is indicative of brighter prospects.

Earnings of MedTech Majors at a Glance

Some stocks from the broader Medical space that delivered robust results this earnings season are Intuitive Surgical (NASDAQ:ISRG) , Stryker Corporation (NYSE:SYK) and Merit Medical Systems, Inc. (NASDAQ:MMSI) . Notably, each of the stocks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Intuitive Surgical reported third-quarter 2018 adjusted earnings per share of $2.83, which exceeded the Zacks Consensus Estimate of $2.65. Revenues totaled $920.9 million, which outpaced the consensus mark of $918.6 million.

Stryker posted third-quarter 2018 adjusted earnings per share of $1.69, which beat the Zacks Consensus Estimate by a penny. Operating margin was 17.8%, up 30 bps.

Merit Medical reported third-quarter 2018 adjusted earnings per share of 47 cents, which trumped the Zacks Consensus Estimate of 42 cents. Revenues of $221.6 million edged past the consensus mark of $218 million.

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