Can DaVita make money from Diabetes?

Disturbingly, DaVita Inc. (NYSE: DVA) could make money from America’s bad habits and poor health.

To explain DaVita provides dialysis and integrated care for kidney disease. The main causes of kidney disease are diabetes and metabolic syndrome. Obesity and the lack of exercise are the main cause of metabolic syndrome and diabetes.

The dismal data about America’s health makes DaVita’s future bright. For instance, the Centers for Disease Control and Prevention or CDC, estimates 30.3 million Americans or 9.4% of the US population had diabetes in 2015.

Is Diabetes a value investment at DaVita? 

Frighteningly, the CDC estimates 84.1 million Americans had prediabetes. Prediabetes or metabolic syndrome is a condition that can lead to Type 2 Diabetes. The CDC claims prediabetes often leads to Type 2 Diabetes within five years.

Therefore, 84.1 million Americans are potential customers for DaVita’s services. In addition, Uncle Sam pays for many of DaVita’s services through Medicare and Medicaid. Thus, DaVita has a growing market with a guaranteed source of funding for its products.

Hence, Americans’ love for soft drinks and aversion to exercise could make DaVita a value investment. To explain, doctors think lack of exercise and a bad diet (lots of sugar) causes prediabetes.

The CDC estimates 71.6% of American adults were overweight in 2015-2016. In addition, the CDC claims 39.8% of American adults were obese in 2015-2016. Given these numbers I think DaVita’s market will expand.

Is DaVita making Money?

DaVita (NYSE: DVA) is making money from its business. For instance, DaVita reported a gross profit of $912.91 million on revenues of $2.905 billion for the quarter ending on 30 September 2019.

In addition, DaVita reported an operating income of $378.34 million and an income after tax of $208.53 million for the same quarter. However, DaVita reported a net income of $201.69 million for that quarter.

Impressively, DaVita reported a quarterly operating cash flow of $640.71 million on 30 September 2019. However, DaVita reported a quarterly ending cash flow -$2.326 billion on the same date.

Is DaVita Losing Money?

Thus, DaVita burned cash with its operations. However, DaVita reported an ending cash flow of $3.121 billion on 30 June 2019.

I think DaVita’s cash flows fluctuate because it relies on insurance and Medicare and Medicaid payments. Hence, DaVita receives different amounts of money at different times of the year.  

To explain, insurance companies, Medicare, and Medicaid pay for DaVita’s services in the United States. To clarify, Medicare is America’s single-payer health insurance program for senior citizens. Meanwhile, Medicaid is a state-administered health insurance program for the poor.

Relying on such sources: and similar programs in other countries, could make DaVita’s income unstable. Stockrow estimates DaVita’s revenues grew at a rate of 1.99% in the quarter ending on 30 September 2019. However, DaVita’s revenues shrank at a rate of -1.53% in the previous quarter.

Is DaVita a Value Investment?

Despite that, DaVita’s business can generate lots of cash. In particular, DaVita had $1.458 billion in cash and short-term investments on 30 September 2019.

That number can fluctuate because DaVita had $3.688 billion in cash and short-term investments on June 30, 2019. Thus, I think DaVita is not a value investment because its cash fluctuates.

The fluctuating cash gives DaVita too low a margin of safety for my comfort.  In particular, I think Mr. Market overpriced DaVita at $82.03 on 24 January 2020. However, some investors could appreciate DaVita.

Is DaVita a Good Dividend Stock?

I think DaVita stock is lousy and overpriced because it pays no dividend. In addition, I consider DaVita a morally questionable stock.

DaVita is morally questionable because it profits from poor health. Many, perhaps most, of DaVita’s “customers,” need its products because they overate and refused to exercise.

I think profiting from such habits and forcing up medical costs is wrong. DaVita is even more questionable because taxpayers finance its operations.

Is American Healthcare Sustainable?

Another reason to avoid DaVita is the widespread belief that America’s healthcare system is financially unsustainable.

Many observers; including Warren Buffett, believe healthcare costs are rising too fast to be sustainable. “The ballooning costs of health care act as a hungry tapeworm on the American economy,” Buffett told CNN Business.

To explain, US healthcare spending grew from 5% of the American economy in 1960 to 17.9% in 2016, CNN Business estimates. Furthermore, the Centers for Medicare and Medicaid Service project healthcare will comprise 19.9% of America’s gross domestic product (GDP) in 2025.

I think such rising costs will generate a backlash. I think many insurers and employers will stop offering health insurance because of the cost.

Yes Medicare for All is Coming

This will increase the agitation for single-payer health insurance; Medicare for All, in America. Under Single-payer the government acts as most citizens’ insurance company. That gives government the buying power to force prices down.

Importantly, all the candidates in the Democratic Presidential Primary claim to want a single-payer system. For instance, U.S. Senator Bernie Sanders (I-Vermont); most popular contender, wants a total government health insurance system.

Meanwhile, former Vice President Joe Biden (D-Delaware); the alleged front runner, wants a “public option.” Under the public option all citizens have the chance to participate in Medicare or Medicaid. I consider the public option single-payer because I think most people will chose the cheaper government insurance.

Can DaVita Make Money from Single Payer?

Thus, I think the single-payer health insurance is almost here in America. I think single payer will disrupt American healthcare beyond recognition. DaVita will have a hard  time making money with that disruption.

I think single payer could help DaVita in the long run because Medicare for All could help more people afford DaVita’s services. On the other hand, single-payer insurance could lower DaVita’s profits by limiting the prices it can charge.

In the final analysis, I think investors need to avoid DaVita because healthcare is too unstable to be a value investment.