3 Reasons to Sell DVA and 1 Stock to Buy Instead
DaVita’s 20.6% return over the past six months has outpaced the S&P 500 by 7%, and its stock price has climbed to $183.98 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in DaVita, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is DaVita Not Exciting?
We’re happy investors have made money, but we’re passing on DaVita for now. Here are three reasons we avoid DVA, plus one stock we’d rather own.
1. Sales Volumes Stall, Demand Waning
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Outpatient & Specialty Care company because there’s a ceiling to what customers will pay.
Over the last two years, DaVita failed to grow its treatments, which came in at 7.23 million in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests DaVita might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect DaVita’s revenue to rise by 1.7%, a deceleration versus its 3.9% annualized growth for the past five years. This projection is underwhelming and suggests its products and services will face some demand challenges.
3. Adjusted Operating Margin in Limbo
Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.
Looking at the trend in its profitability, DaVita’s adjusted operating margin might have fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 15.4%.
Final Judgment
DaVita isn’t a terrible business, but it doesn’t pass our bar. With its shares topping the market in recent months, the stock trades at 11.7× forward P/E (or $183.98 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re fairly confident there are better investments elsewhere. We’d suggest looking at the Amazon and PayPal of Latin America.
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