DaVita Healthcare Partners: An Undervalued Healthcare Play

We started this week’s options trading activities with an exploration of the possibilities inherent in trading the options of stocks making new highs. We explored bull calls on options of Globalstar Inc. on Monday, we explored covered calls on The Walt Disney Company yesterday and we are taking it a notch higher with the options of a healthcare company today.

DaVita HealthCare Partners Inc. (NYSE:DVA) is $15.31B company that provides dialysis services in the United States for patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD). The company blipped on my trading radar last Friday when it made a new high to $70.71. On Monday, the company made another new high of $71.43 before it settled to close at $71.21. Yesterday, DaVita made a new high of $71.70 and it has recorded a new $71.73 high today. These new highs being recorded by the company might look like minor increments; yet, the show a predominantly bullish trend in an overvalued industry.

More Room to Grow

It is no longer news that the healthcare sector is overvalued as biotechs continue to overpromise and under-deliver. However, DaVita HealthCare Partners is one of the few companies in the healthcare industry that has not been affected by the “Overvaluation Virus”. The company has a market capitalization of $15.31B; yet, its PE is unbelievably low at 19.56. In addition, worthy of note is the company’s low Price to Book ratio of 3.2

Refinancing to Stay Afloat

DaVita on June 2 announced the proposed refinancing of its existing debts in a move that will enable it repay some 6.375% senior notes worth $775 million, which are set to expire in 2018. Under the proposed refinancing, DaVita will enter new senior secured credit facilities of $5.5 billion and the issuance of up to $1.75 billion aggregate principal amount of unsecured debt. It might interest you to know that DaVita’s $5.5 billion credit facility contains $1B term loan A and another $3.5B term loan B. Hence, these refinancing efforts will go a long way in assisting the company reduce its indebtedness and to improve its debt-to-capital ratio.

Guidance Recommends Caution

Despite the fact that DaVita is making new highs, the company reported lower earnings in the last reported quarter and the guidance for the next quarter has been reduced.

“We are updating our consolidated operating income guidance for 2014 to now be in the range of $1.725 billion to $1.840 billion. Our previous consolidated operating income guidance for 2014 was in the range of $1.725 billion to $1.860 billion”

How to Trade DVA Options

DaVita has been consistent in how it has been making new highs recently and all the events surrounding the company points to continued bullishness on the horizon, albeit on a cautious note. I am cautiously bullish on DaVita with a $75 price target somewhere within the next six months. Hence, I recommend DVA Jan 2015 72.500 call (DVA150117C00072500). You may also want to consider covered calls with the DVA Jan 2015 75.000 call (DVA150117C00075000).

— Daily Option Alerts

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