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In a Form 3 filing issued with the SEC earlier this morning, Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) disclosed that it now owns more than 10% of dialysis services provider DaVita Inc. (NYSE:DVA).The move increased Buffett’s total holdings of DaVita to 10.2 millionshares, with the most recent transaction amounting to little over280,000 shares worth $29.7 million. The “Oracle of Omaha” now holds awhopping $1.1 billion in DaVita stock. Here’s a complete look at Warren Buffett’s holdings.
In early morning trading following therelease, shares of the company were up almost 1.5%. Before you writeoff these gains as purely speculative, it’s important to remember thatempirical studies have proven that individual investors who mimic or“monkey,” the world’s most successful hedge fund managerscan beat the market by 7 percentage points a year. Therefore, it’sworth looking into a potential motive behind Buffett’s bullish DaVitabet.
Since the start of 2012, DaVita hasbeen a solid investment, returning 37.8%. This appreciation hasoutpaced the medical care industry’s average (23.8%), and competitors Baxter International Inc. (NYSE:BAX) at 22.6%, and Fresenius Medical Care AG & Co. (NYSE:FMS) at10.3%. Over this same time, DaVita has reported generally impressiveearnings, beating the Street’s estimates in three straight quarters.This streak is longer than that of Baxter, which has beat analystforecasts in two straight quarters, but below similarly-sized peerslike Fresenius, HCA Holdings Inc (NYSE:HCA), and Tenet Healthcare Corporation (NYSE:THC).
In its most recent earnings release,DaVita reported an EPS of $1.49, beating consensus by 2 cents, eventhough the company experienced larger than expected second quarterlosses related to its international expansion efforts. CEO Kent Thirycalled the period “rock-solid,” claiming that his company “perform[ed]well clinically, operationally and strategically.”
Part of DaVita’s internationalexpansion plan includes partnering with medical organizations inSoutheast Asia, Europe, and the Middle East to bring affordabledialysis care to patients of all nationalities. Most of the company’scosts related to this activity stems from the legal and professionalservice fees needed to close the deal on partnerships and acquisitions.These expenses totaled $12 million in the past quarter, and the companyexpects to lose $30 million by the end of this year, though execs state“international expansion is a long-term growth activity, it willrequire … continued losses in the short term.”
Most likely, Buffett is optimistic thatthese expansion plans will help DaVita generate solid earningsappreciation going forward. Early estimates expect the company toaverage EPS growth of 12.3% a year over the next half-decade. This isdecidedly more impressive than its aforementioned competitors, asBaxter (8.5%), Fresenius (10.5%), HCA Holdings (10.9%), and TenetHealthcare (12.2%) all have lower expected EPS growth.
From a valuation standpoint, we can seethat investors are not overpaying for DaVita’s earnings potential, asthe company’s stock sports a PEG ratio of 1.54; typically any figurebetween 1 and 2 indicates shares are trading at a fair price. Moreinterestingly, DaVita is actually cheaper than the likes of Baxter,Fresenius and Tenet Healthcare, which trade at an average PEG of 2.36.Only HCA Holdings, which trades at a PEG of 0.48, is a better value.
One final point worth mentioning isthat DaVita appears to have the first step on its competitors due toits advantageous operational efficiency. Over the past twelve months,the company has averaged operating (16.1%) and net (6.9%) margins farabove the industry averages (12.4%, 4.3%), indicating that Buffett ismost likely a fan of DaVita’s superior cost-saving abilities.
While DaVita is expecting double-digitearnings expansion in a time when the majority of other companiesoperating in the medical care industry are predicting much less, thebiggest reason to be bullish on this stock is that investors can trulybuy growth at a reasonable price. Despite DaVita’s gains in 2012 thusfar, valuation indicators suggest that more appreciation may be on thehorizon, and a boost from Warren Buffett is never a bad thing.
Other fund managers that currently hold DaVita are Andreas Halvorsen’s Viking Global, Stephen Mandel, and Lee Ainslie,though Buffett owns more than twice the number of shares as the nextclosest fund. For a complete look at the hedge fund industry’ssentiment toward this stock,
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| No. | Hedge Fund | Shares | Value (x$1000) | Activity | % Port |
|---|---|---|---|---|---|
| 1.) | Berkshire HathawayWarren Buffett | 9,300,000 | $913,353 | +55% | 1.22% |
| 2.) | Viking GlobalAndreas Halvorsen | 3,158,258 | $310,172 | +114% | 2.5% |
| 3.) | Lone Pine CapitalStephen Mandel | 3,049,139 | $299,456 |  | 1.76% |
| 4.) | Pennant Capital ManagementAlan Fournier | 2,688,972 | $264,084 | -13% | 6.14% |
| 5.) | Gates Capital ManagementJeffrey Gates | 811,188 | $79,667 | -9% | 6.13% |
| 6.) | Maverick CapitalLee Ainslie | 690,616 | $67,825 | | 0.99% |
| 7.) | D E ShawD. E. Shaw | 455,982 | $44,782 | +21% | 0.11% |
| 8.) | Citadel Investment GroupKen Griffin | 449,493 | $44,145 | +2613% | 0.08% |
| 9.) | Conatus Capital ManagementDavid Stemerman | 419,033 | $41,153 | | 2.03% |
| 10.) | Bridger ManagementRoberto Mignone | 335,000 | $32,900 | | 2.1% |
| 11.) | White Elm CapitalMatthew Iorio | 195,415 | $19,192 | +40% | 5.24% |
| 12.) | Adage Capital ManagementPhill Gross And Robert Atchinson | 129,700 | $12,738 | -25% | 0.04% |
| 13.) | Soros Fund ManagementGeorge Soros | 123,000 | $12,080 | -30% | 0.17% |
| 14.) | Aqr Capital ManagementCliff Asness | 74,254 | $7,292 | -15% | 0.03% |
| 15.) | Lmr PartnersBen Levine, Andrew Manuel And Stefan Renold | 66,786 | $6,559 | | 0.54% |
| 16.) | Orbimed AdvisorsSamuel Isaly | 65,000 | $6,384 |  | 0.17% |
| 17.) | Winton Capital ManagementDavid Harding | 52,843 | $5,190 | +104% | 0.18% |
| 18.) | Diamondback CapitalRichard Schimel | 51,406 | $5,049 | -77% | 0.18% |
| 19.) | Hoplite Capital ManagementJohn Lykouretzos | 46,002 | $4,518 | +3% | 0.19% |
| 20.) | Grt Capital PartnersGregory Fraser, Rudolph Kluiber, And Timothy Kroch | 34,000 | $3,340 | -0% | 1.01% |
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