Great post, Chris. Really enjoyed the analysis and your probabilistic view of the future and how it could potentially effect the cash flow streams of the business.
I find it interesting that most of the time market participants are much more focused on next quarter’s results and fail to think about the long term free cash generation ability of the business and how it effects value. But, for some reason, when it comes to “disruptive” changes that will likely take a number of years to even potentially materialize, the market is suddenly fixated on impairments to terminal value. You’ll have a situation where it will take 10+ years to see any changes to cash flows, and let the stock trade at 5x FCF in the process, disregarding that you basically can make your money back in 5 years assuming rational capital allocation. Not sure if it’s a overestimation of the timing, or magnitude of the potential change, or both. Either way, it offers interesting opportunities for rational investors like yourself to potentially capitalize.
In the interest in having a balanced view or of trying to better understand the market's new view (because you always want to understand what the other guy thinks) DaVita does have >$8 billion in net debt, and the value of most companies is out in the terminal value. If you think DaVita is a terminally declining business, this 10-15% FCFE yield isn't an unfair price to pay, since a portion of equity cash flows will be used for debt repayment while the cash flows themselves decline.
I think if you reverse engineer the price and think about it, that's a way to look at it.
I just don't think it's probable that this is the case where the market seems to think it is.
You also get all the capital return in terms of buybacks and not dividends, so there's no cash pulled out between now and 10-15 years from now, which also means you've kind of got to believe it's not a dying business.
If I think more about it, what the market thinks, and what the mistake would be, I think this is a fair way to look at what being wrong would look like.
Great post, Chris. Really enjoyed the analysis and your probabilistic view of the future and how it could potentially effect the cash flow streams of the business.
I find it interesting that most of the time market participants are much more focused on next quarter’s results and fail to think about the long term free cash generation ability of the business and how it effects value. But, for some reason, when it comes to “disruptive” changes that will likely take a number of years to even potentially materialize, the market is suddenly fixated on impairments to terminal value. You’ll have a situation where it will take 10+ years to see any changes to cash flows, and let the stock trade at 5x FCF in the process, disregarding that you basically can make your money back in 5 years assuming rational capital allocation. Not sure if it’s a overestimation of the timing, or magnitude of the potential change, or both. Either way, it offers interesting opportunities for rational investors like yourself to potentially capitalize.
Thanks Larson, appreciate it.
In the interest in having a balanced view or of trying to better understand the market's new view (because you always want to understand what the other guy thinks) DaVita does have >$8 billion in net debt, and the value of most companies is out in the terminal value. If you think DaVita is a terminally declining business, this 10-15% FCFE yield isn't an unfair price to pay, since a portion of equity cash flows will be used for debt repayment while the cash flows themselves decline.
I think if you reverse engineer the price and think about it, that's a way to look at it.
I just don't think it's probable that this is the case where the market seems to think it is.
You also get all the capital return in terms of buybacks and not dividends, so there's no cash pulled out between now and 10-15 years from now, which also means you've kind of got to believe it's not a dying business.
If I think more about it, what the market thinks, and what the mistake would be, I think this is a fair way to look at what being wrong would look like.