Industry: health care
The company provides kidney dialysis services in the U.S., as well as integrated healthcare delivery and management services in the Western and Southern states, under contracts with various U.S. health plans.
|Most recent||Growth rate (CAGR)|
|1 year||5 years||10 years|
|Book value of equity per share||$25.26||-1.5%||2.5%||10.1%|
|BV including aggregate dividends||-1.5%||2.5%||10.1%|
|1 year||5 years||10 years|
|Most recent||Growth rate (CAGR)|
|1 year||5 years||10 years|
|1 year||5 years||10 years|
A company creates wealth for its long-term shareholders in 2 main ways - through dividend payments and through the accumulation of retained earnings. This graph shows the accumulation of per-share equity of long-term shareholders (green bars), which consists of the retained earnings plus all capital invested in the company, and the cumulative dividends the company has paid over time per share of its stock (blue bars).
In the words of Warren Buffett: "We're looking for... businesses earning good returns on equity while employing little or no debt."
Return on equity is a key metric of financial performance, indicating a company's ability to generate earnings using shareholder capital. Over time, ROE is one of the major determinants of the rate at which a company creates shareholder wealth. The average ROE for large U.S. companies is 12%, and many investors use it as a threshold for attractive investments.
Companies can boost ROE by increasing leverage, which reduces the safety of the investment. Therefore, it is useful to look at the return on assets (ROA), which measures a company's earning power regardless of its capital structure. A widening gap between ROE and ROA may be a warning sign that should be thoroughly investigated.
Earnings per share is a popular metric used to value a company (using P/E ratio); growth in EPS is often used to judge company growth potential. However, many investors believe that EPS is an inferior metric to ROE, because it ignores the amount of capital the company used to generate earnings.
Free cash flow shows how much cash a company generates from operations, above and beyond what is required to maintain or expand its productive assets. This cash can be returned to investors, or spent by management on growing the company or paying back its debts.
Balance sheets of many companies contain intangible assets such as goodwill, trademarks, patents, etc. Many investors consider intangibles more difficult to value than physical assets. If intangible assets had been valued incorrectly, they must be impaired, resulting in a loss charged against shareholder equity. This chart demonstrates the potential loss to shareholder equity from such impairments.
Companies often use debt financing to increase their return on equity. However, as the amount of debt financing increases relative to the amount of equity financing, the company becomes more sensitive to down turns and other negative events. As a result, many investors use the ratio of debt to equity as a measure of a company's financial risk, and avoid companies that have this ratio above 1.
This chart shows shareholder equity as a percentage of total assets, allowing investors to judge the overall leverage. Companies with a higher proportion of equity can be viewed as safer investments. This metric is particularly important for highly leveraged institutions, such as banks, where it must be at least 4% according to government regulations.
The ratio of current assets to current liabilities is known as the current ratio. This metric is a quick measure of the company's ability to pay its short-term obligations. A current ratio below 1 is a warning sign that should be investigated, especially for companies that cannot count on adequate cash flow from operations.
This chart shows the cumulative dilution of investor ownership in a company over time. Dilution reduces an investor's participation in the future earnings. Dilution increases when a company issues new shares, and decreases when a company buys its shares back. Many investors avoid companies with large chronic dilution.
analysis provides insight into factors affecting the Return On Equity of a company.
The DuPont equation decomposes ROE as follows:
ROE = (Net margin) * (Asset turnover) * (Asset to equity ratio)
Net margin indicates operating efficiency, Asset turnover measures the total asset use efficiency, and the Asset to equity ratio is a measure of financial leverage.
The dividend payout ratio tells investors what percentage of earnings a company returns to shareholders, and what percentage it retains and reinvests. This ratio represents a major capital allocation decision by the company, and can be used to judge management rationality. Rational management should pay out all earnings that cannot be productively reinvested. Therefore, a low dividend payout ratio for a profitable company with a low growth potential may be a warning sign.
Many investors use the P/B ratio as a quick way of judging company valuation. Value investors - followers of Graham and Dodd - specifically seek out companies with low P/B ratios. However, investors should be careful not to make investment decisions on this metric alone, without considering a company's earning and growth potential, since a low P/B ratio can be a sign of a bleak future for the business.
P/E ratio is a popular way of making a quick judgment of a company valuation. Value investors - followers of Graham and Dodd - often seek solid companies with low P/E ratios as investment opportunities. However, P/E ratio represents an oversimplified approach to business valuation, and can often lead to incorrect investment decisions.
On November 3, 1995, the Company completed an equity offering of 6.9 million shares of its common stock, par value $0.001 (the "Common Stock"). In connection with this offering the Company's directors redesignated the Class A Common Stock as "Common Stock", authorized an increase in the number of shares of Common Stock to 55,000,000, par value $0.001, authorized 5,000,000 new shares of preferred stock, par value $0.001, and approved a three-into-two reverse stock split of the Company's Class A and Class B Common Stock. Additionally, as of December 4, 1995, all Class B Common Stock was converted to Common Stock.
On April 3, 1996, the Company completed an equity offering of 8,050,000 shares, 3,500,000 of which were sold for the Company's account and 4,550,000 of which were sold by certain of the Company's stockholders. The net proceeds to the Company of $110.1 million from the offering were used to repay borrowings incurred under the Company's senior credit facility ("the Senior Credit Facility") in connection with the Caremark Acquisition.
On February 27, 1998 the Company acquired Renal Treatment Centers, Inc. ("RTC"), with headquarters in Berwyn, Pennsylvania (the "Merger"). In connection with the Merger, the Company issued 34,565,729 shares of its Common Stock in exchange for all of the outstanding shares of RTC Common Stock. RTC shareholders received 1.335 shares of the Company's Common Stock for each share of RTC Common Stock that they owned. The Company also issued 2,156,424 options in substitution for previously outstanding RTC stock options, including 1,662,354 of the vested options that were exercised on the merger date or shortly thereafter. In addition, the Company guaranteed $125,000,000 of RTC's 5 5/8% subordinated convertible notes. In conjunction with this transaction, the Board and the Company's stockholders authorized an additional 140,000,000 shares of Common Stock. The RTC merger transaction has been accounted for as a pooling of interests and as such, the consolidated financial statements have been restated to include RTC for all periods presented.
On February 27, 1998 the Company acquired Renal Treatment Centers, Inc. ("RTC"). RTC has always used a December 31 year end while the Company used a May 31 year end until May 31, 1995 after which it changed to a December 31 fiscal year end. Accordingly, the restated consolidated financial statements combine the Company's balance sheet as of December 31, 1997 and 1996 and the results of operations and cash flows for the twelve months ended December 31, 1997 and 1996, the seven month period ended December 31, 1995 and the twelve months ended May 31, 1995 with RTC's balance sheet as of December 31, 1997 and 1996 and the results of operations and cash flows for the twelve months ended December 31, 1997 and 1996, the six months ended December 31, 1995 and the twelve months ended December 31, 1994, respectively.
As of December 31, 1999, the Company was not in compliance with certain covenants in its credit facilities. As a result of this non-compliance, all debt outstanding under the credit facilities and the convertible subordinated notes as of December 31, 1999 was potentially callable and due within one year, and therefore had been reclassified from long-term debt to a current classification. On July 14, 2000 a restructuring of the credit facilities was completed, and the Company is now in compliance with all credit facility covenants. Accordingly, the long-term portion of our debt was not classified as a current liability as of June 30, 2000.
On June 6, 2002, the Company completed the next phase of the recapitalization plan with the repurchase of 16,682,337 shares of its common stock for approximately $402,000 [K], or $24 per share, through a modified dutch auction tender offer.
On October 5, 2005, we completed our acquisition of DVA Renal Healthcare, Inc. (formerly known as Gambro Healthcare, Inc.) from Gambro, Inc. under a Stock Purchase Agreement dated December 6, 2004, for approximately $3.06 billion, subject to a tax basis step up election as discussed below. DVA Renal Healthcare was one of the largest dialysis service providers in the United States, operating 566 outpatient dialysis centers, serving approximately 43,000 patients, and generating annual revenues of approximately $2 billion. We have incurred approximately $29 million in acquisition related costs through December 31, 2005. In conjunction with the acquisition, we entered into an Alliance and Product Supply Agreement, or the Supply Agreement, with Gambro AB and Gambro Renal Products, Inc. for ten years. Under the Supply Agreement we are committed to purchase a significant majority of our hemodialysis products, supplies and equipment at fixed prices. The Supply Agreement commitment has been valued as an intangible liability at $162 million. In addition, if we make an election pursuant to section 338(h)(10) of the Internal Revenue Code as permitted under the Stock Purchase Agreement, we would be required to make an additional cash payment to Gambro Inc., which we currently estimate at approximately $170 million. The operating results of DVA Renal Healthcare are included in our consolidated financial statements from October 1, 2005.
On November 1, 2012 we completed our acquisition of HCP pursuant to an Agreement and Plan of Merger dated May 20, 2012, whereby HCP became a wholly-owned subsidiary of the Company. HCP is one of the countrys largest operators of medical groups and physician networks generating approximately $2.4 billion in annual revenues and approximately $488 million in operating income for the year ended December 31, 2011. The operating results of HCP are included in our consolidated financial results from November 1, 2012. The total consideration paid at closing for all of the outstanding common units of HCP was approximately $4.70 billion, which consisted of $3.64 billion in cash, net of cash acquired, and 9,380,312 shares of our common stock valued at approximately $1.06 billion. The total acquisition consideration is subject to a post-closing working capital adjustment. The acquisition agreement also provides that as further consideration, we will pay the common unit holders of HCP a total of up to $275 million in cash if certain performance targets are achieved by HCP in 2012 and 2013. In conjunction with the acquisition, we amended our Senior Secured Credit Agreement (the Credit Agreement) to allow for additional borrowings of $3.0 billion and also issued new senior notes for $1.25 billion, all of which was used to finance the acquisition, pay-off a portion of our and HCPs existing debt, and to pay fees and expenses.