Is DaVita A Suitable Stock For Value Investors?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put DaVita Inc. (NYSE:DVA) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, DaVita has a trailing twelve months PE ratio of 17.7, as you can see in the chart below:

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 20.3. If we focus on the long-term PE trend, DaVita’s current PE level puts it below its midpoint over the past five years, with the number having fallen rapidly over the past few months.

Further, the stock’s PE also compares favorably with the Zacks classified Medical - Outpatient and Home Healthcare industry’s trailing twelve months PE ratio, which stands at 19.8. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that DaVita has a forward PE ratio (price relative to this year’s earnings) of just 18.6, which is higher than the current level. So it is fair to expect an increase in the company’s share price in the near term.

P/CF Ratio

An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.

The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.

In this case, DaVita’s P/CF ratio of 6.5 is significantly lower than the Zacks classified Medical - Outpatient and Home Healthcare industry average of 11.3, which indicates that the stock is hugely undervalued in this respect.

Broad Value Outlook

In aggregate, DaVita currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes DaVita a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, its P/S ratio (another great indicator of value) comes in at 0.9, which is far better than the industry average of 1.1. Clearly, DVA is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though DaVita might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘A’ and a Momentum score of ‘F’. This gives DVA a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been unfavorable. The current quarter has seen one estimate go higher in the past sixty days compared to four lower, while the full year estimate has seen one up and seven down in the same time period.

As a result, the current quarter consensus estimate has fallen by 2.2% in the past two months, while the full year estimate has inched lower by 1.4%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

DaVita HealthCare Partners Inc. Price and Consensus

DaVita HealthCare Partners Inc. Price and Consensus | DaVita HealthCare Partners Inc. Quote

Notably, the stock has a long term expected earnings growth of 9.8% and sports a Zacks Rank #3 (Hold). These mixed expectations indicate that while the stock’s growth story might be good over the long term, analysts have some apprehensions about the stock in the immediate future. Thus, we are looking for in-line performance from the company in the near term.

Bottom Line

DaVita is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a better industry rank (top 38% out of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the Zacks Medical - Outpatient and Home Healthcare industry has clearly underperformed the broader market, as you can see below:

So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look. See the pot trades we're targeting>>