Is a Big Share Buyback Coming to DaVita?

Wells Fargo increased its valuation range for DaVita to $85.00 to $95.00 per share from a prior range of $78.00 to $85.00.

The firm believes that the chances of a share repurchase are significantly higher in 2015 than they have been in recent years. DaVita had about $1.0 billion in cash on its balance sheet at the end of 2014, and it is estimated to reach $1.3 billion by the end of 2015. At the same time, the company’s debt-to-EBITDA is 2.8 times, which is below its target leverage ratio of 3.0 to 3.5 times.

ALSO READ: Fresh Biotech Stock Picks With Targets 50% to 100% Higher

DaVita does not plan to pay a dividend. Also it is unlikely that the company will take on a large acquisition while management is focused on getting HCP Inc. (NYSE: HCP) on track for accelerated growth. By process of elimination, there is not much the company could do other than let cash sit on the balance sheet or buy back stock. This was a consistent topic for investors. At the end of 2014, the company had an outstanding authorization of $358 million. Although the company has not repurchased much stock in recent years, note that between 2009 and 2011 it repurchased over $1 billion of stock. At its current share price, $1 billion could purchase about 6.0% of outstanding shares.

Wells Fargo thinks that management expects Amgen Inc. (NASDAQ: AMGN) will lower prices for Epogen in order to maintain market share as alternative drugs become available. In Europe, Amgen lowered prices 20% to 30% for that reason. Wells Fargo estimates that this is equivalent to a potential savings of $160 million, or about $0.45 to $0.50 per share, compared with a 2016 consensus estimate of $4.24.

Despite a disappointing first two years at HCP, DaVita continues to believe that the business model will prove successful as health care moves toward an accountable care/population health structure.

Midday Monday, shares of DaVita were up 1.2% at $81.55, in a 52-week trading range of $66.60 to $83.04. The stock has a consensus analyst price target of $77.00.

ALSO READ: Catalysts and Data Could Move 4 Top Biotech Stocks