Ted Weschler’s Favorite Health Care Company: DaVita HealthCare Partners Inc (DVA), Fresenius Medical Care AG & Co. (ADR) (FMS)

After you add in 4% annual sales growth for both companies — far below their historical sales growth rates and assumes they do not gain any additional market share — then investors in DaVita HealthCare Partners Inc (NYSE:DVA) will receive a 9.54% annual return and investors in Fresenius will receive an 8.56% annual return.

These are “pretty good” estimates of what the two companies’ stocks will return for investors who buy in today. The returns could easily be higher if the two companies gain market share, but changes in Medicare payments can also derail the investment.

Either way, an 8% to 9.5% annual return is likely to beat the market over the next decade.

International Competition

Besides changes to Medicare, the biggest threat to DaVita and Fresenius is international competition. Neither firm has a foothold in non-U.S. markets, but DaVita seems keen on investing overseas anyway. Free cash flow does shareholders no good if it is re-invested in unprofitable operations, so it is important to evaluate the company’s likelihood of success overseas.

Baxter International Inc. (NYSE:BAX)

Final Thoughts

DaVita and Fresenius operate in a niche industry that is expected to continue growing as the American diet continues to wreak havoc on the health of U.S. citizens. Both companies have a competitive advantage in the form of economies of scale and profit from a virtual duopoly.

So it’s not hard to see why Ted Weschler is crazy about DaVita HealthCare Partners Inc (NYSE:DVA). DaVita is not especially cheap right now, thought it should provide above-market returns over the next 10 years. Both DaVita and Fresenius Medical Care AG & Co. (ADR) (NYSE:FMS) are good choices to round out a diversified portfolio — but neither will be a home run at current levels.

The article Ted Weschler’s Favorite Health Care Company originally appeared on Fool.com and is written by Ted Cooper.

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