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Earnings Results: Dialysis company DaVita stock suffered worst day in 22 years after big profit miss, disappointing outlook

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Shares of DaVita Inc. plummeted in active trading Friday, to suffer their worst performance in more than two decades, after the dialysis company reported third-quarter that fell well below expectations and slashed its full-year outlook, citing declining treatments and rising labor costs.

The stock
DVA,
-27.09%

dove 27.1% to $70.54, the lowest close since April 3, 2020. Trading volume swelled to about 5.4 million shares, compared with the full-day average over the past 30 days of about 629,500 shares.

It was the biggest one-day selloff for the stock since it tumbled 32.2% on Jan. 19, 2000.

“The third quarter was a challenging quarter for us. Like others in the healthcare community, negative volume trends due to COVID and continued labor pressure impacted our financial performance more than expected,” said Chief Executive Javier Rodriguez.

The company reported net income that fell to $105.4 million, or $1.13 a share, from $259.8 million, or $2.36 a share, in the same period a year ago. Excluding nonrecurring items, adjusted earnings per share declined to $1.45 from $2.35, missing the FactSet consensus of $1.77.

Revenue grew 0.4% to $2.95 billion, while operating revenue $2.70 billion was below expectations of $2.98 billion, according to FactSet.

Total U.S. dialysis treatments were 7.34 million, or an average of 92,859 per day, compared with 7.47 million, or 94,509 a day last year, and down 0.4% from the sequential second quarter. Revenue per treatment rose 2.0% to $360.54, while patient care costs per treatment increased 5.7% to $242.09.

For 2022, the company cut its guidance range for adjusted EPS to $6.20 to $6.70 from $7.50 to $8.50.

“We have anticipated that the volume declines from COVID and the labor market pressures would impact our revenue growth and margins in 2022, but we had expected relief from both dimensions in 2023,” Rodriguez said on the post-earnings conference call with analysts, according to a FactSet transcript. “We are now assuming these challenges will persist longer than expected, which is what accounts for the change in our guidance.

DaVita’s stock has slumped 38.0% year to date, while the SPDR Health Care Select Sector exchange-traded fund
XLV,
+1.64%

has slipped 5.7% and the S&P 500 has dropped 18.2%.

Reasons for volume declines, labor pressure

On the post-earnings conference call CEO Rodriguez said there were three main reasons for the volume decline:

1.Census growth before excess mortality — “[W]e have seen a decline in patient admissions during each COVID surge…followed by a rebound after each surge,” Rodriguez said.

After admissions declined earlier in the year because of the surge in the omicron variant of the COVID-19 virus, a rebound in the second half of the year was expected. “We did not see the expected rebound in Q3 and are assuming continued pressure on admissions in Q4 and through 2023,” Rodriguez said.

2. Missed treatments — After the omicron surge caused missed treatments rates increased. “We anticipated these increases would return to seasonal norms after the winter surge, and they have not,” Rodriguez said. “As a result, we’re now assuming these will remain elevated through the end of this year through 2023.”

3. Excess mortality — COVID mortality rates in 2022 are down from prior years. “Excess mortality remains a challenge for us,” Rodriguez said. “We expect it to persist in Q4 and into 2023. The magnitude of the impact will depend on the size and the severity of COVID surges this winter and through the rest of 2023.”

Besides volume challenges, the company experienced “extremely significant wage pressure” this year, with an expected 2022 headwind of about $100 million to $125 million.

And the company had expected the contract labor costs to remain elevated in the third quarter, but at levels below the second quarter. But in fact, third-quarter costs increased relative the second quarter, and any decline is now expected to occur later and be lower than originally anticipated.

For 2023, the company is expecting headwinds from labor pressure and inflation of $300 million to $250 million.

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