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Acadia Healthcare: Behavioral Health Centers Play

Acadia Healthcare (NASDAQ:ACHC) is not your regular healthcare and pharma stock. The company deals in a very specific niche of behavioral healthcare through multiple facilities across the US, UK, and Puerto Rico. The demand for behavioral healthcare services such as de-addiction centers and inpatient psychiatric facilities is rising and the management has been aggressively increasing the number of beds and the number of facilities.

ACHC has strong financial fundamentals and our evaluation of the company’s strategy indicates that the stock could be an interesting bet for medium-term investors.

Company Overview

The core business of ACHC is the acquisition and development of behavioral healthcare facilities. Most of the company’s revenues come from its operations related to acute inpatient psychiatric facilities and specialty treatment facilities. The largest payments to the company come from Medicaid in the US and the National Health Service in the UK. ACHC also has a business segment related to other activities which include education, children’s services, adult and elderly care. The company has around 584 behavioral health facilities with approximately 17,800 beds including inpatient psychiatric hospitals, specialty treatment facilities, residential treatment centers and outpatient clinics.

Good Results, Capacity Growth, And Strong Fundamentals

The company recently released its results for the first quarter of 2018 and there were a lot of positives for investors holding the stock. ACHC’s total revenues for the quarter were $742 million, an increase of 9.3% as compared to the corresponding quarter of the previous year. The highlighting point was the fact that the same facility revenues grew by around 5.6% across the company. The same facility revenues in the US were up by 6.1% whereas those in the UK were up by 4.6%. There was also a 2% increase in patient days and a 3.5% increase in the revenues per patient day.

These are all green flags in favor of ACHC coupled with the fact that the EBITDA of the company rose to $145.7 million, an increase of 6.9% as compared to the corresponding quarter of 2017. Apart from this, the industry growth of behavioral healthcare facilities, particularly de-addiction centers, is very high in the US. This is a positive sign for ACHC investors coupled with the fact that the management is working hard towards capacity growth. They plan to add 800 new beds to existing and new facilities during the course of 2018. The joint initiative of ACHC and Saint Thomas Health to open a psychiatric inpatient hospital is also a positive step to capitalize on the growth of the market.

Source: ACHC/Finviz

The above extract re-emphasizes our comments on the strength of the fundamentals of ACHC. The first highlighting point is the revenue growth over the past five years which has been as high as 47.4%. This number is expected to grow as the company increases its centers due to the rising demand for de-addiction services in the US and the UK. The bottom-line growth has also been excellent as we see ACHC’s EPS growing by 45.7% over the past 5 years.

Despite all these positives, the stock trades at a Price to Earnings ratio as low as 17.45 and a Price to Sales ratio of 1.2. The stock is also trading below the 20-day and the 50-day simple moving average levels. There is no doubt that the upswing in the price is overdue as a result of strong multiples expansion and there is a reasonable chance that the stock might go back to its previous high.

Source: Historical Data from ACHC; Estimates based on calculations by Baptista Research

As we can see in the financials above, ACHC has shown decent revenue growth over the past three years. The revenues were more or less flat in 2017 but the management got the benefit of higher margins through reduced depreciation and amortization expenses resulting in a higher EBIT. There were no extraordinary expenses in the year and the Net Income margin grew to 7%.

The management has also been very positive when it comes to the earnings guidance and have projected a revenue of $3.04-3.08 billion for 2018 with an EBITDA between $637 million and $644 million and an EPS ranging from $2.58 to $2.62.

Analyst Expectations And Price Projection

Source: ACHC/MarketWatch

If we look at the summary of the analyst recommendations in the extract above, we see that 10 out of 16 analysts covering the stock have a BUY recommendation whereas the balance 6 have a HOLD recommendation. It is evident that the general view on the stock is reasonably bullish.

Source: ACHC/CNNMoney

The extract above gives us a range of the forecasted price of these 16 analysts of ACHC and it also portrays a reasonably optimistic view of the stock. The highest target price for the stock in the medium-term is $50 which is a 26.2% appreciation over the current market price and the median price projection is $45 which also implies a 13.6% stock appreciation.

In order to determine our projected price for ACHC, we have carried out a technical analysis of the stock in order to determine its key support and resistance levels.

Our first observation when we see the chart of ACHC is that the stock has a very big gap between its support and resistance levels despite being low-priced. As we see, the key resistance ahead of the stock is at the level of $53 whereas the support is quite low at around $29. ACHC has been range bound between these two levels since the past twelve months and has steadily begun its movement towards the upper limit of resistance.

Source: Yahoo Finance

We have also used the Gann’s Square of Nines technical indicator in order to re-verify the resistance levels and determine the ideal target price for the ACHC stock. The key resistance of ACHC as per this indicator is around $49. We adopt a conservative approach and pick the lower resistance of $49 as our target price for a horizon of 2-3 quarters. Even with this target price, the approximate returns for investors entering the stock at the current market price are over 20%.

Risks

The valuation and projected price of ACHC in this article are specific to the date of the analysis i.e. 11th June 2018. We must emphasize that these projections are dependent on a number of factors – ACHC’s continued capacity increase through higher number of beds and more centers, the growth in demand for behavioral healthcare facilities and de-addiction centers in the US and UK, continued realization of the profitability, free cash flows and the other assumptions taken into account.

Although we are reasonably confident of our projections, our analysis cannot be directed to providing any assurance about the achievability of the forecasted price. There is a possibility that the actual results of ACHC are different from the projections as a result of unexpected events and circumstances e.g. poor judgment on the part of the ACHC management with respect to the demand, the capacity increase by the management going un-utilized, a change in the core management, changed investor perception regarding ACHC and the behavioral healthcare sector, trade recession, war and so on.

Conclusion

ACHC’s niche of behavioral healthcare is experiencing strong growth and the management’s guidance for 2018 is good enough to draw the interest of the investor community. The current Price to Earnings ratio of the stock is as low as 17.45 and there is an excellent scope for multiples expansion if the management keeps delivering good results and utilizing its newly increased capacity.

Our price target for ACHC is $49 for a horizon of 2-3 quarters and we believe that the strong macro and the competent management will ensure that this stock provides good returns to medium-term investors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Article source: https://seekingalpha.com/article/4180993-acadia-healthcare-behavioral-health-centers-play