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.

Large Cap Watch List (Track at Marketocracy) member DaVita Inc. (DVA), announced results for the quarter ended June 30, 2007. Excluding the valuation gain on the Company’s Product Supply Agreement with Gambro Renal Products, and excluding after-tax gains on the sale of investment securities the company earned $0.83 per share, well ahead of analyst estimates. The company also raised guidance for the remainder of the year:

We are revising our 2007 operating income guidance: operating income is now expected to be in the $790-$820 million range. Our previous guidance was for operating income to be in the range of $740-$780 million.

Unfortunately, the company now expects next year to be flat.

Our operating income guidance for 2008, excluding the impact of any potential Medicare legislation, is projected to be in the range of $790-$850 million. We are entering into a period of unusual earnings uncertainty. Therefore the guidance range for 2008 does not capture as high a percentage of the potential outcomes as usual.

Analysts were expecting a double-digit gain in 2008 earnings per share.

Looking at the cash flow statement, I also have some earnings quality concerns. Cash from operations was down despite an increase in net income. Changes in working capital, particularly squishy “other” asset and liability accounts, were the primary reason for the difference. Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Second Edition cites large changes in other assets and liabilities as a warning sign.

Large Cap Watch List (Track at Marketocracy) member DaVita (DVA) reported earnings:

DaVita Inc. (DVA), today announced results for the quarter ended March 31, 2007. Net income for the three months ended March 31, 2007 was $76.6 million, or $0.72 per share, as compared with $57.5 million, or $0.55 per share, for the same period of 2006.

Analysts were expecting the company to earn $0.72. Although the numbers for the quarter were spot-on, the company raised its operating income guidance for the full year.

We are revising our 2007 operating income guidance: Operating income is now projected to be in the range of $740-$780 million. Our previous guidance was for operating income to be in the range of $700-$760 million. Operating cash flow for 2007 is currently projected to be in the range of $460-$510 million.

As a general rule, we don’t like it when companies issue guidance that you have to figure out. Why guide operating income when the reporting is primarily in net? In this case, when we extrapolate out the current non-operating items we get a $2.82 number, while the analyst consensus is at $3.12. Were the non-operating expenses (interest cost) higher than normal in the first quarter? Will there be higher expected non-operating income for the full year? Are analysts consensus figures incorporating some sort of pro-forma “operating income” based earnings per share? Or were the analyst estimates just too high?

It sounds like the company will have a lot of explaining to do on the conference call.

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Large Cap Watch List (Track at Marketocracy).

Though less than the Small Cap Watch List and Mid Cap Watch List (Track at Marketocracy), there was still relatively high turnover in this list. 14 of the original 33 names made the cut for the new list (which was trimmed to just 26 names.) Part of the reason for the turnover was to reduce overlap between the lists. One third of the Mid Cap Watch List (Track at Marketocracy) names appear on each of the Small Cap and Large Cap Watch List (Track at Marketocracy)s, but there is no longer any overlap between small and large.
So without further ado, the names on the chopping block from the previous list are:

3M (MMM); Continental (CTTAY.PK); Mitsui (MITSY); Anheuser-Busch (BUD); ConocoPhillips (COP); Helix Energy (HELX); IndyMac Bancorp (NDE - Annual Report); Barr Pharmaceutical (BRL - Annual Report); Quest Diagnostics (DGX); Public Storage (PSA); ITT Educational Services (ESI); Equifax (EFX); Rent-a-Center (RCII); Kroger (KR); Ricoh (RICOY); First Data Corp. (FDC); Expeditors International (EXPD); and Keyspan (KSE).

The new list is: