DaVita Inc. (NYSE:DVA) Screens Well But There Might Be A Catch

Want to participate in a short research study? Help shape the future of investing tools and earn a $40 gift card!

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider DaVita Inc. (NYSE:DVA) as an attractive investment with its 14.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's superior to most other companies of late, DaVita has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for DaVita

Does DaVita Have A Relatively High Or Low P/E For Its Industry?

An inspection of average P/E's throughout DaVita's industry may help to explain its low P/E ratio. You'll notice in the figure below that P/E ratios in the Healthcare industry are higher than the market. So it appears the company's ratio isn't currently influenced by these industry numbers whatsoever. In the context of the Healthcare industry's current setting, most of its constituents' P/E's would be expected to be raised up. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.

Keen to find out how analysts think DaVita's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like DaVita's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 74%. However, this wasn't enough as the latest three year period has seen a very unpleasant 18% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 8.9% per year during the coming three years according to the twelve analysts following the company. That's shaping up to be similar to the 9.3% each year growth forecast for the broader market.

With this information, we find it odd that DaVita is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Bottom Line On DaVita's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that DaVita currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

We don't want to rain on the parade too much, but we did also find 2 warning signs for DaVita that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.