DVA 1Q26
More volume growth?!
DaVita said the number again. Stock’s up again. Little else to say!
Perhaps I trimmed our position too soon, but that’s hindsight, and I liked the BN & KKR risk/reward better (DVA has some obsolescence risk and carries a lot of debt).
This’ll be short.
The quarter:
Volume growth: this was the key thing. You’ve heard me and the company’s management mention this several times lately. DaVita’s now guiding for acceleration, from flattish volume to… well… it’s hard to tease out, but it seems they’re saying 0.5-1% by 4Q 2026, i.e., the exit run-rate for the year. I think this is what the market’s excited about today. There have been a lot of 0’s and even some slightly negative numbers for years now :(. The drivers:
There’s a one-time market share gain from Fresenius, the main competitor in this quasi-duopoly, as they’re right-sizing their footprint and closing smaller unprofitable centers.
But then there’s been a greater-than-expected decline in patient mortality. That could mean their new initiatives are working, or not. They didn’t elaborate. We’ll see. I have half a mind to email IR but I realized knowing the answer wouldn’t change whether I buy or sell any stock (e.g., to add to KKR, which is what I’m thinking now). If they can fix this, volume growth will finally push back toward 2%ish for a number of years.
Third, new admissions were a little low. Since they’re guiding to higher volume growth, despite below-average new patient admits, this suggests growth should actually be stronger farther out. We know the company regularly analyzes its “pipeline” — the census of late-stage CKD patients, some of whom will soon be diagnosed with ESRD and become a DaVita patient — and hasn’t found any reason for structurally lower admits. They’ve said so before. They’d have mentioned this today if it changed.
This points to green shoots for the most important KPI right now, so it’s probably why the stock was +20% May 6 (they reported May 5th after market close).
Revenue/treatment (RPT): rates are rising. E.g., Medicare boosted fee-for-service rates an average ~2.2% in dialysis, and DVA periodically negotiates contracts (rates) with the insurers. Over time, this makes up for cost inflation, mainly nurses’ wages, though DVA passes through a lot of its productivity benefits given the industry’s competition & the decent negotiating power of big insurers. DVA expects 1-2% RPT growth, about the historical average. Would not be surprised if it’s accelerates in 2027 because of higher cost inflation lately, but it depends on Medicare rates. Note Medicare’s dialysis treatment dollar increase was much larger in 2026 (~$7-8) than 2025 (~$2). I don’t track this closely because it washes out over time. Government and insurers accept paying more due to cost inflation, but also expect providers to pass through productivity benefits. The industry’s competitive structure hasn’t changed in this regard.
Value proposition: there’s more to add to our mountain of evidence that DaVita (a) is the highest-quality (from the patient’s perspective) large-scale Dialysis provider, and (b) adds value to the healthcare system by reducing costs vs. competitors & potential new entrants. On the call, they explained: CKCC is a program1 the industry has with CMS for integrated kidney care (i.e., value-based contracting). DVA is performing well on the metrics CMS tracks, like gross savings, a total quality score, and a ranking as “high-performing.” DVA created more total savings than any participant, and a >4% savings rate. CMS changes the items in its scores periodically, so there’s no point finding out each thing in detail, but this 4% is a meaningful number vs. I’ve seen elsewhere in healthcare. A reminder: under these VBC contracts, DaVita basically gains control of the patients’ full healthcare treatment regimen and orchestrates care with each patient’s other providers and doctors. By trying to optimize the patient’s total care regimen (rather than have each specialist doctor operate alone for each health issue a patient has), DVA is able to improve the patients’ health outcomes while also having those patients cost the healthcare system less. The biggest lever is that usually they can catch things earlier and the patient ends up in the ER less often, and hospital ERs are an astronomical cost. Each ESRD patient costs the government and the insurers six-figure amounts per person per year, and ESRD patients cost way more than the average elderly+sick person — they are among the most expensive. So even moderate savings here imply massive dollar savings for the government and for the major health insurers.
Recall of their >250,000 patients, <70,000 are on VBC (~25%) where DaVita’s responsible for those patients’ care and financial outcomes. So a big opportunity — 75% of DVA’s patients — lies ahead for DVA’s VBC business.
Valuation: the stock still trades for only 11x free cash flow despite being a ~20% ROE kind of business that may finally be returning to low-mid-single-digit growth. The risk/reward’s still moderately attractive, but other things in the portfolio (like KKR) are more attractive, so I’m considering trimming further. It’s tricky because we want to capture the upside if/as this keeps playing out.
Not much else new. Just thought I’d send this given the stock moved.
— Chris
Test & live programs CKCC have existed 10+ years, under different acronyms.