DVA: Davita Looks Healthy

My latest column is up at RealMoney.

DaVita (DVA) is a leading provider of dialysis services in the U.S. for patients suffering from chronic kidney failure, also known as end-stage renal disease, or ESRD. As of Dec. 31, 2007, the company operated or provided administrative services to 1,359 outpatient dialysis centers serving about 107,000 patients.

The total ESRD market is estimated at 340,000 patients and is growing 3% to 4% annually. DaVita and its largest competitor, Fresnius Medical Care (FMS) , together control 65% of the dialysis market.

Over the last 12 months, DaVita’s free cash flow (cash flow from operations less capital expenditures) has been nearly $250 million, or 4.4% of the company’s market capitalization. When combined with the 15% expected growth in earnings over the next three to five years, the risk premium looks attractive. The free cash flow could also provide support to the valuation levels.

Though I’m not a technical analyst by trade, I also take comfort in the fact that it looks like DaVita stock may have bottomed in March, and that there is nearer-term support at the 50-day and 200-day moving averages — both of which are in the $52-$53 range. Those could be good spots for an initial trading stop or protective put options in case things go wrong.

Disclosure: At time of publication William Trent has no financial position in the companies mentioned in this article.