Skip to Content
Stock Strategist

Dominance in Dialysis Digs DaVita a Moat

We think the company's advantages will protect shareholder returns over the long run.

Mentioned: ,

 DaVita’s (DVA) narrow economic moat is due to the company’s dominant and essential position in the U.S. dialysis market, accounting for over one third of all dialysis facilities and patient treatments. While there’s been much investor concern over the last few years that ultimately stems from an industry structure that levies industrywide profits on a small handful of commercially insured patients, we’d caution investors to not lose sight of the bigger picture. DaVita provides lifesaving healthcare services to chronically ill patients in a low-cost, outpatient setting. Because the alternative to outpatient dialysis is higher-cost, less-efficient, and more-burdensome acute therapy, we see little likelihood of DaVita faltering due to regulatory disruption in the long term. We think continued scrutiny of patient assistance programs could cause near-term pain for the industry, limiting patients’ ability to continue on their commercial plans. Over time, however, we think this would catalyze further industry consolidation, leaving DaVita in a comparably advantaged position versus smaller, independent peers that lack the cost advantages present in its operations. We think investors need to balance these risks against the industry’s compelling volume growth that is likely to average in the low to mid-single digits annually.

We take a favorable view of management’s recent sale of the DaVita Medical Group assets. Long a drag on profitability and returns on capital, the business had perennially underperformed following its acquisition in 2012. Absent any major structural changes to dialysis reimbursement policy, we anticipate DaVita’s returns on capital to improve as management focuses on scaling up its international presence without the distraction of DMG. While our assessment is that management’s capital-allocation prowess is somewhat tarnished by its experience with DMG, its planned use for the $4.9 billion in proceeds is largely debt reduction and stepped-up share repurchases, which we like as near immediate value-creating capital-deployment options.

Jake Strole does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.