Davita Inc

DaVita has steady demand and real cash flow, but debt and policy risk leave no margin of safety at today's price

DaVita runs dialysis centres, home dialysis and hospital contracts, mostly in the United States, and is paid per treatment for a therapy patients need for life. The record is steady: 0 loss years across 15 years, operating margin averaging 15% with volatility of 2.1%, and normalised owner earnings (cash an owner could take out after maintenance spending) of $1.1B. Quality is mixed. Return on invested capital of 14% on average is respectable, but pricing power is weak and the company says "The payments we receive from commercial payors generate nearly all of our profits". Debt of $10.3B and negative book value of -$651.1M come from years of borrowing to buy back shares. At $187.31 the share sits above our base-case value of $145.24, a margin of safety of -29%, so the engine's verdict is a demanding price.

DaVita runs outpatient dialysis centres, home dialysis programmes and hospital dialysis contracts, mostly in the United States. Dialysis is a life-sustaining treatment for people whose kidneys have failed. DaVita is paid a fee for each treatment. Most patients are covered by Medicare at fixed bundled rates, but the company says nearly all of its profit comes from the smaller group of patients on commercial insurance. Smaller sidelines include international clinics, integrated kidney care contracts that share savings with insurers, a laboratory and clinical research.

• Treatment volume: patients needing about three sessions a week
• Revenue per treatment, set by Medicare rules and commercial contracts
• Share of patients on higher-paying commercial insurance
• Labour and supply costs against annual rate increases
• Share buybacks funded by debt and operating cash flow

Inside the circle? Demand is recurring and hard to defer, because failed kidneys need treatment for life, and the record shows 0 loss years across 15 years with operating margin volatility of only 2.1%. Against that, profit rests on a narrow slice of commercial patients whose rates, coverage and charitable premium support are under steady legal and payor pressure. Medicare rates lag inflation, new drugs such as GLP-1s could slow the growth in patient numbers, and debt of $10.3B limits room for error. A careful owner can estimate revenue ten years out with some confidence. Profit is much harder to estimate, because it depends on policy decisions the company cannot control.

What protects DaVita is local density and relationships: a national network of centres, ties to the nephrologists who refer patients, non-compete clauses with medical directors, and CMS certification, which makes each centre slow and costly to copy, in a market where patients need treatment near home several times a week. The numbers back up a real but modest edge: operating margin has averaged 15% with volatility of only 2.1%, and return on invested capital (profit after tax divided by the debt and equity funding the business) averaged 14%, reaching 18% in the latest year. The headline return on equity of 57% is not a fair cross-check, because buybacks funded with debt have pushed book value to -$651.1M, and the excerpts give no gross margin history. Pricing power is weak: Medicare sets most rates, commercial payors are pushing rates down, and the company says nearly all profit comes from that narrow commercial group. We would call the moat narrow, likely to hold for years on volume, with profit exposed to policy and payor decisions DaVita cannot control.

DaVita pays no dividend (0.0% average payout) and sends most of its spare cash into share repurchases, much of it funded with new borrowing. The diluted share count has shrunk at -10% a year. That is a large return of capital to remaining owners, and repurchases made after year end were at prices below our base-case value of $145.24. The cost is a balance sheet carrying $10.3B of debt, interest coverage of 3.8× and negative book value of -$651.1M, which makes the reported return on equity of 57% close to meaningless. The retained-earnings test scores 0.2×, so the long record of retention has created little market value per pound kept. The filing is plain about risk and about where profit comes from, but it leans on adjusted operating income and does not explain how it judges a buyback price against value.

• Buybacks are the main use of cash. The share count has fallen at -10% a year, and the filing names a repurchase agreement with Berkshire Hathaway as a selling shareholder.
• Repurchases run alongside new debt. In 2025 the company refinanced its term loans and issued new senior notes while buying back stock, keeping total debt at $10.3B against free cash flow of $1.3B.
• Side investments have been uneven. The Mozarc venture produced equity losses including impairment and restructuring charges, and international growth came largely through acquisitions.
• Disclosure is direct about the key weakness: nearly all profit comes from commercial payors. The filing also reports an adjusted operating income figure next to the statutory one, which an owner should reconcile.

• FailsLittle or no debtFails

  Total debt of $10.3B would take 9.0 yrs of normalised owner earnings to repay; operating income covers interest 3.8×.

  Why this test
• FailsThe $1 retained testFails

  Each dollar retained over the period has been matched by 0.2× of market value created ($6.3B retained in total).

  Why this test

Several of Buffett's tests are met. Demonstrated, consistent earning power passes, and owner earnings are real: free cash flow has averaged 195% of reported profit, and capital spending runs at 1.2× depreciation, so the business does not eat capital. The durable competitive advantage is narrow. Local density, nephrologist relationships and certification protect volume, but pricing power, which Buffett calls the single most important test, is weak because Medicare sets most rates and private payors "aggressively negotiate terms with us". The little-or-no-debt principle fails clearly: debt payback is 9.0 yrs and interest coverage 3.8×. That debt makes the average return on equity of 57% unreliable as a test of high returns without leverage. On capital allocation, the share count has fallen at -10% a year, and post year-end repurchases, which included shares bought "from Berkshire Hathaway Inc. (Berkshire) pursuant to our previously disclosed share repurchase agreement", were at prices below our base value. Yet the one dollar retained test scores 0.2×, and the filing does not explain how management judges buyback prices against intrinsic value. Finally, margin of safety fails: the bear case of $31.37 shows how much value rests on commercial profit holding up.

• Share of U.S. dialysis patients and revenue from non-hospital commercial payors

  Nearly all profit comes from this group, and the expiry of enhanced premium tax credits and payor plan designs could shrink it.

• Revenue per treatment against patient care cost per treatment

  Costs grew faster than revenue per treatment in 2025, and the company expects costs that may outpace rate increases in 2026.

• Debt level, interest coverage and the credit-agreement leverage ratio

  With coverage of 3.8×, a fall in commercial profit would quickly squeeze the room to service debt.

• Treatment volumes and patient census growth

  Volumes fell in 2025 on mortality and missed treatments, and new drugs could slow growth in kidney failure.

• Prices paid for buybacks against a conservative value estimate

  Repurchases only create value below intrinsic value, and the filing gives no stated framework for that judgement.

Questions the filings couldn't answer

• How large is the profit gap between commercial and government patients, and how much commercial mix loss would push owner earnings towards the bear case?
• How will management weigh further debt-funded buybacks against reducing debt if rates or payor terms worsen?
• What happens to phosphate binder economics when the transitional payment period ends after 2026?