Warren Buffett loves "toll bridge" businesses -- those that offer an essential product or service. DaVita (DVA -0.06%), which provides life-sustaining renal dialysis, is one such company. That's why Mr. Buffett's company, Berkshire Hathaway, first bought shares back in 2011. Berkshire now owns over 36 million shares representing 38% of the entire company.
DaVita recently reported its second-quarter results, which were mainly in line with expectations. Revenue of $2.93 billion matched Wall Street forecasts, and earnings per share (EPS) of $2.30, as measured under generally accepted accounting principles (GAAP), beat estimates by $0.22. The company's full-year adjusted EPS guidance was in a range of $7.50 to $8.50; the consensus estimate was $7.84.
Helping with a tough choice
DaVita provides renal dialysis for patients suffering from end-stage kidney failure. They are in a difficult position: They can either have a kidney transplant or dialysis for the rest of their lives. Because the waiting list for replacement kidneys is very long, most patients' only option is dialysis. Thus, DaVita falls under the toll bridge category.
The dialysis treatments are paid for by insurance companies. So DaVita's revenue is split between Medicare and private insurers. Medicare patients make up around half of its revenue but provide almost none of its profits.
But revenue from private payers is very profitable. DaVita has significant leverage when negotiating prices with private insurers. Given the life-supporting nature of the company's services, private payers are unlikely to lower the price they are willing to pay for dialysis. If they were to play hardball with DaVita, they would risk losing customers and major employer plans, and tarnish their reputation.
The company forecasts $850 million to $1.1 billion in free cash flow (FCF) for 2022. DaVita has a long track record of strong FCF, another tenet in the Buffett playbook. Over the years, the company has used its FCF to repurchase shares at a rapid clip.
For example, through the first six months of 2022, DaVita spent $603 million to buy back nearly 6 million shares. In doing so, its share count fell by 5.3%, from 96.3 million shares at the beginning of the year to 91.3 million at the end of the second quarter.
Its history of share repurchases goes back even further. Between 2017 and the third quarter of 2021, the company cut its share count by 43%.
Because of Davita's long-term appetite for share repurchases it seems to have been devouring everyones's shares except Berskhire's. Buffett's steadfast ownership of its shares, combined with Davita's repurchases, has increased Berkshires ownership stake from 17% at the end of 2013 to its current 38%.
Is DaVita stock a buy?
Most renal failure is brought on by diabetes, which is increasing in the U.S. Driven by population and diabetes growth, forecasts for end-stage renal disease say it is expected to grow anywhere from 41% to 83% by 2030. DaVita should be able to meet this need, which is why one of the world's foremost stock pickers considers it a toll bridge company, and you can invest alongside him.