When you're Warren Buffett, people pay attention to what you buy. Lots of people.
It's no surprise, then, that Mr. Buffett's increased stake in DaVita Healthcare Partners (NYSE:DVA) caught many investors' eyes. Berkshire Hathaway (NYSE:BRK-B) reported its third-quarter portfolio update this week. One of the most notable changes was the 23.5% growth in the company's position in DaVita.Why is Warren Buffett so bullish about this health-care stock? Here are three key reasons.
1. Its business is simple.
Warren Buffett buys businesses that he can understand. With a straightforward business model, DaVita checks that requirement off the list. The company provides dialysis services to patients with chronic kidney disease or end-stage renal disease and operates medical groups and physician networks.
That's not to say that running the business is necessarily simple for DaVita. The company faces continual challenges of dealing with government reimbursement changes. Its HealthCare Partners business segment deals largely with capitated contracts with health plans -- not an easy management task.
However, the services DaVita provides are relatively simple to understand. And that's what Buffett and Berkshire like.
2. It's a long-term play.
You can bet that if Berkshire adds to an existing position, Warren Buffett believes in the company's long-term potential. DaVita, founded in 1999, hasn't been around as long as many of the companies in which Berkshire has invested, but it has quickly become one of the top players in the dialysis market.
The company operates more than 2,100 dialysis centers in the U.S. and 10 other countries. Only Fresenius Medical Care (NYSE:FMS) is larger, with nearly 3,200 dialysis centers across the world. Together, the two companies command more than 70% of the U.S. market.
More than 20 million American adults have kidney disease, making it the eighth-leading cause of death in the nation. The need for dialysis services likely won't diminish for the foreseeable future.
3. It's growing shareholder equity.
Another thing that Buffett likes is a company that boosts shareholder equity. Equity growth is a good way to spot a company that's making smart choices that reward investors. How well has DaVita done on that front? Take a look at the chart below.
DaVita has grown shareholder equity nearly three times more than its primary rival Fresenius over the last five years. What's more, the company even outperformed Berkshire Hathaway itself on that score.
Can DaVita continue those winning ways? It has a good shot. One way is to grow earnings enough to reduce its debt. Of course, the way to grow earnings is to increase revenue faster than expenses.
DaVita should see solid revenue growth as the American population ages and more people need dialysis and other services that the company provides. The company could also be able to control expenses thanks to one of its partners -- Rockwell Medical (NASDAQ:RMTI). Rockwell's anemia drug Triferic could help DaVita and other dialysis providers cut costs considerably if the drug gains regulatory approval next year. DaVita participated with Rockwell Medical in the phase 3 clinical study for the drug.
Warren Buffett sets a high bar for the companies that Berkshire buys. However, not every company meets every desired characteristic. DaVita is no exception.
The company hasn't done very well on its return on invested capital, for instance. And as for value, well, let's just say that DaVita probably wouldn't make too many lists of value stocks right now, with a trailing price-to-earnings multiple of nearly 22.
Still, though, Buffett doesn't pour more money into a stock that he doesn't think will increase in price over the long run. It usually pays to pay attention to his picks.