Company Reports

GLP-1 drug use is increasing materially in patients with diabetes and obesity, and uncertainty around GLP-1 expansion has added risk to dialysis stocks even as pandemic challenges, including excess mortality and labor costs, are easing for the narrow moat dialysis companies we cover—Baxter, DaVita, Fresenius Medical Care, and Fresenius SE. Despite the concerns, new data rolling in on GLP-1s appears roughly in line with our view that GLP-1 expansion should not materially affect dialysis demand for at least the next decade, as mildly extended kidney disease progression to dialysis may be largely offset by cardiac and first-year survival, or "crash," benefits. Considering this roughly neutral outlook, we find the significant discounts to fair value in dialysis-related stocks compelling.

Shares of dialysis-related narrow-moat companies Baxter, DaVita, Fresenius Medical Care, and Fresenius SE rose materially on news from a kidney-related trial of Novo Nordisk's obesity drug Ozempic (semaglutide). Similar to the 20% reduction in cardiac events seen in another trial for semaglutide (Novo Nordisk's Wegovy) in 2023, Ozempic was found to reduce the risk of major kidney disease-related events by 24%, including cardiac events, deaths, and kidney disease progression. Dialysis investors appear relieved that the reduction in all of those events wasn't much larger than the cardiac event benefits already seen in recent trials, suggesting that GLP-1s like semaglutide probably are not ushering in a paradigm shift in kidney disease progression. Baxter, Fresenius Medical Care, and Fresenius SE all trade at material discounts to our fair value estimates even after their shares' rise in early trading March 5.

Narrow-moat DaVita turned in strong fourth-quarter results that exceeded our expectations, and management gave an initial view of 2024 that looks stronger than we were anticipating. We are increasing our fair value estimate to $122 per share from $104 on these strong trends and cash flows.

After selling the DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients primarily in the United States with an expanding international footprint. Over several decades, DaVita has built the largest network of dialysis clinics in the U.S., and although COVID-19-related mortality and labor pressures cut into DaVita's profits in recent years, we see brighter days ahead for DaVita, despite some challenges emerging on the obesity drug front.

Narrow-moat DaVita turned in strong third-quarter results that exceeded expectations, and management increased its 2023 guidance for the third time this year. We are keeping our $104 fair value estimate intact, but recognize the firm's strong trends on the top and bottom lines, which may be enhanced by management's plans to resume its share repurchase program. We think repurchases would be a good use of capital considering recent trades well below intrinsic value and the firm's leverage in the middle of its target range.

After selling the DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients primarily in the United States with an expanding international footprint. Over several decades, DaVita has built the largest network of dialysis clinics in the U.S., and although COVID-19-related mortality and labor pressures cut into DaVita's profits in recent years, we see brighter days ahead for DaVita, despite some challenges emerging on the obesity drug front.

Shares of dialysis-related narrow-moat companies—DaVita, Fresenius Medical Care, Fresenius SE, and Baxter—all declined substantially on news that a kidney-related trial of Novo Nordisk's obesity drug Ozempic slowed the progression of kidney disease in patients with chronic kidney disease and diabetes. These results suggest the new obesity drugs may slow the incidence rate of patients needing dialysis in the long run, which we plan to account for in new fair value estimates by reducing our long-term growth assumptions in this group. With the most exposure to dialysis patient growth, we plan to reduce our fair value estimates on DaVita and Fresenius Medical Care by about 10%. Fresenius SE holds a large stake in Fresenius Medical Care, but the diversity of its operations constrained our fair value decline to the midsingle digits. Baxter's business diversity also helps blunt the impact of this news along with recently generated cash flows, and we do not plan on making any change to our Baxter fair value, although market sentiment around its 2024 kidney care spinoff valuation may be lackluster. Even with these challenges and lower fair values, we continue to view shares in these firms as significantly undervalued.

Narrow-moat DaVita turned in second-quarter results that exceeded expectations, and management increased its 2023 guidance for the second time this year. We have increased our fair value estimate to $116 per share from $108 to reflect these strong trends, especially on the margin and working capital front.

After selling the DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients primarily in the United States with an expanding international footprint. Over several decades, DaVita has built the largest network of dialysis clinics in the U.S., and although COVID-19-related mortality and labor pressures cut into DaVita's profits in recent years, we view DaVita's long-term prospects as solid.

Narrow-moat DaVita turned in first-quarter results that exceeded expectations, and management increased its guidance for the full year. At first glance, we remain comfortable with our $108 fair value estimate, and shares continue to trade below that valuation

Narrow-moat DaVita turned in fourth-quarter results that were slightly better than we anticipated, allowing it to mildly exceed our 2022 estimates. However, 2023 guidance appears slightly weaker than expected. Those two factors largely offset in our model though, and we expect to maintain our $108 fair value estimate. DaVita shares remain moderately undervalued, in our opinion.

Narrow-moat DaVita turned in third-quarter results that were significantly lower than expected, and management pulled down key metrics of its 2022 and preliminary 2023 outlook. Considering these weak near-term prospects, we are reducing our fair value estimate by 7% to $108 per share. Despite this reduction, the shares appear moderately undervalued, especially after the big selloff after the earnings release.

After selling the DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients primarily in the United States with an expanding international footprint. Over several decades, DaVita has built the largest network of dialysis clinics in the U.S., and although COVID-19-related mortality concerns look likely to constrain results through 2022, we view DaVita's long-term prospects as solid.

Despite significant challenges, DaVita reported solid second-quarter operating results that allowed the company to maintain its 2022 outlook, which appeared in stark contrast to its key peer Fresenius Medical Care's report last week. With DaVita generally tracking toward our expectations for the full year, we are maintaining our $116 fair value estimate and continue to think shares remain undervalued. We believe DaVita's narrow economic moat appears intact, too, reflecting significant intangible assets and cost advantages associated with its top-tier position in dialysis services, despite ongoing challenges.

Shares of U.S. dialysis service providers declined substantially on June 21 after the U.S. Supreme Court offered a surprising decision in the case of Marietta Memorial Hospital Employee Health Benefit Plan versus DaVita. In that decision, the majority of the court ruled that Marietta's decision to keep DaVita (and its key peer Fresenius Medical Care) out-of-network for Marietta's insured population did not break the law since it treated all insurance plan holders equally. As a result of this ruling, we are raising our uncertainty ratings for DaVita and Fresenius Medical Care to high from medium (and keeping Fresenius SE's uncertainty rating at high) since this decision could allow insurers to push outpatient dialysis services out of network for all plan members, including dialysis patients. We suspect such a shift, if unchecked by a statutory language change by Congress for example, could create a significant financial burden on the roughly 10% of U.S. dialysis patients that currently receive treatment through commercial insurance plans and represent the vast majority of U.S. dialysis service-related profits.

After selling the DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients primarily in the United States with an expanding international footprint. Over several decades, DaVita has built the largest network of dialysis clinics in the U.S., and although COVID-19-related mortality concerns look likely to constrain results through 2022, we view DaVita's long-term prospects as solid.

Shares of DaVita declined around 6% in after-hours trading after the company reported first-quarter results that were weaker than market expectations. However, given the omicron variant surge during the period and labor challenges permeating the healthcare sector, we weren't terribly surprised with the weak results. Additionally, management maintained its guidance for the full year and noted that treatment volumes even started increasing in March and April.

After trimming guidance for 2021 and expressing caution on 2022 during its third-quarter call, DaVita turned in solid operating results and guided in line with our 2022 expectations on its fourth-quarter call. We are boosting our fair value estimate to $116 per share from $110 primarily to reflect a change in our long-term U.S. corporate tax rate estimate after previously assuming the tax rate would rise on Democratic policy initiatives, which appear unlikely now. Also, our fair value depends on business conditions normalizing in 2023 and beyond, and despite the near-term constraints, we continue to see significant intangible assets and cost advantages around DaVita's top-tier position in dialysis services, which informs our narrow moat rating on the firm.

After selling the DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients primarily in the United States with an expanding international footprint. Over several decades, DaVita has built the largest network of dialysis clinics in the U.S., and although COVID-19-related mortality concerns look likely to constrain results through 2022, we view DaVita's long-term prospects as solid.

After Sen. Joe Manchin (D-VA) announced opposition to the Build Back Better bill, we do not expect Congress to enact policies that will significantly increase the insured rate in the U.S. beyond recent measures. While we view this development as mildly negative operationally for medical services firms, positively, those concerns appear likely to be at least offset in our fair value estimates by a reversal of our assumption that the U.S. corporate tax rate would rise and recent cash flows. However, maintaining the status quo in the U.S. healthcare system could keep ESG risks alive for medical service firms in the long run.