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Stock Strategist

Home Dialysis to Benefit These Undervalued Providers

DaVita and Fresenius are best positioned to capture the incremental profits from home therapy.

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We expect  DaVita (DVA) and  Fresenius Medical Care (FMS)/(FME) to benefit as higher-margin home dialysis treatments gain share, with growth of nearly 8% set to outpace in-center dialysis growth of roughly 2.6%, driven by increasing interest across the industry to lower treatment costs. Specifically, the U.S. Department of Health and Human Services has proposed potential changes to reimbursement policy that are likely to encourage home treatment for kidney failure. Home therapy has been making a slow but consistent resurgence over the past decade; in this piece, we examine the competitive implications for DaVita and Fresenius should a more meaningful mix shift be on the horizon. Ultimately, we think these companies’ established clinic networks, along with the sticky relationship among provider, physician, and patient, will prove too high a barrier for competitors. While the stocks of both companies look cheap following recent underperformance, we think DaVita’s nearly 30% discount to our fair value estimate presents a compelling investment opportunity.

Adoption of Home-Based Dialysis Therapy Has Been Slow
The two primary modalities amenable to at-home treatment are hemodialysis and peritoneal dialysis. Home hemodialysis is similar to treatments done in the clinic--patients use a machine to remove blood from the body, pass it through an external filter, and return the cleaned blood to the body. These treatments are typically shorter but more frequent than in-center hemodialysis. Peritoneal dialysis requires a tube to be inserted into a patient’s abdomen to use his or her own abdominal membrane (peritoneum) as the filter. The patient either inserts and removes dialysis solution manually throughout the day or uses a cycler machine to automate these exchanges at night.

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

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