We last looked at dialysis services provider DaVita (NYSE:DVA) for our Daily Double feature back in early 2001, following a nice 12-month stock run-up. Four days later, the company announced that the U.S. Attorney's office was looking into its billing procedures, relationships with physicians, and more -- sending the shares quickly downward again.
About a year later, the Health and Human Services Department's Office of the Inspector General subpoenaed the company, effectively extending the U.S. Attorney's inquiry to cover the years between May 1996 and May 2002. The last time DaVita mentioned this in a public filing -- its 10-Q report for Q1 -- it said the investigation is ongoing and is at an "early stage."
While much of this wording is likely boilerplate, the filing notes, "if a court determines that there has been wrongdoing, the penalties under applicable statutes could be substantial." All this time, meanwhile, a judge has been looking over claims by a Medicare carrier that it was overbilled by some $20 million between 1995 and 1998. While the company appeared to have won a minor victory in mid-2002, that situation, too, is ongoing.
We mention all this only because all this uncertainty stands in stark contrast to DaVita's financial performance over the last few years. Q3 results, announced yesterday, looked fairly strong across the board. Free cash flow outpaced net income and the balance sheet looks better -- more cash, less long-term debt -- than it did to end 2002. The company has added new dialysis centers, increased its revenue per treatment, and repurchased shares.
All this has helped the stock outperform those of competitors Fresenius Medical Care (NYSE:FMS) and Renal Care Group (NYSE:RCI) by a broad margin since late 2000.
So, are investors paying enough attention to the legal concerns hanging over the company? Given the information that's publicly available, it's difficult to say -- beyond that the market shaved off some 17% of DaVita's market value in one day back in 2001 when news of the U.S. Attorney's inquest broke.
DaVita's performance is tempting, but unless you've better info than we have, you might want to watch this one from the sidelines. At very least, fasten your seatbelts.
Dave Marino-Nachison can be reached at [email protected].
