More Buys At DaVita: Is Buffett Betting on Medicare and Medicaid?

Billionaire Stephen Mandel’s Lone Pine Capital owned just over 3 million shares of DaVita HealthCare Partners Inc at the end of the third quarter (check out Mandel’s stock picks). Mandel is a Tiger Cub, having previously worked at Julian Robertson’s Tiger Management. Another successful Tiger Cub, Andreas Halvorsen, currently heads Viking Global; Viking was another major shareholder in DaVita, reporting a position of 2.9 million shares of the stock (find Halvorsen’s favorite stocks).

DaVita is fairly large in terms of specialty health services companies; three publicly-traded comparables are Mednax Inc. (NYSE:MD), HEALTHSOUTH Corp. (NYSE:HLS), and Acadia Healthcare Company Inc (NASDAQ:ACHC). These companies focus on neonatal care, rehabilitative care, and behavioral healthcare respectively. Acadia is the growth story of the lot: its net income more than doubled between Q3 2011 and last quarter, though trailing profits are fairly low. Continued growth is expected to bring its 2013 earnings high enough for a forward P/E multiple of 23, though there is significant short interest in the stock. Mednax and Healthsouth have been seeing good revenue growth, though Healthsouth’s earnings have been slipping. Each of these companies trades at a discount to DaVita: their trailing P/E multiples, for example, are 17 and 12. Of course all of these peers are in distinct businesses, but all of them should be affected by any changes to Medicare or Medicaid.

DaVita doesn’t look particularly attractive compared to these other companies (though, of course, it would be difficult for Buffett to build up a large position in these smaller peers; as it is Berkshire owns a substantial amount of DaVita’s outstanding shares). It therefore seems that Buffett and his investment team aren’t worried at all about budget cuts, and in fact see healthcare provision as an undervalued industry (or it’s possible that they are bullish on kidney treatments in particular). We would be more cautious, both relative to the company and the industry, but it could be useful to take note of Berkshire’s continued purchases of the stock.