ACHC (Acadia Healthcare Company, Inc.):
Can Acquisitions Heal This Healthcare Stock?
By: Dan Kralovec, student at Marquette
University
Summary
•
Acadia Healthcare operates inpatient psychiatric facilities, residential treatment centers, group homes, and substance abuse facilities in the United States and Great Britian. It competes in a highly specialized environment - and successful
acquisitions have been (and are likely to remain) the main driver of growth.
•
The industry is consolidating and success is driven by bed psychiatric bed
count – and ACHC has added over 500 beds to their facilities in 2015.
•
Given the recent increase in mental health awareness, we should see a decision
in FY 2016 with regard to US Medicaid laws that restrict thousands from seeking
mental health services.
Acadia Healthcare Company, Inc.
(NASDAQ: ACHC) continues
to show great growth potential despite the overall poor performance in the
healthcare sector over the past few months. Acadia is an industry-leading
provider of specialized behavioral health services to individuals suffering
from mental health disorders and/or alcohol and drug addiction. ACHC operates
232 facilities between the U.S. and the U.K with a combined total of 9,200
psychiatric beds.
It’s
difficult to establish a foothold in the behavioral health services industry
due to a high degree of specialization. Likewise, this space has been subject
to much consolidation as of late. Being a pure play healthcare company, ACHC
has grown primarily through strategic acquisitions. This past year, they’ve
acquired eight companies, which have added significantly to their facility portfolio
and total bed count. Management recently affirmed that FY2016 should reflect
this past year’s acquisition strategy. Last month, Acadia acquired MMO
Behavioral Health system, its two locations with a combined 80 beds. The annual
$16 million in revenue is expected to be immediately accretive to Q4 financial
results. To remain competitive, ACHC not
only continues to acquire value added companies, but also allocates an enormous
amount of time and capital towards the improvement of existing facilities to
meet any increasing demand for a specific service. They’re constantly upgrading
systems, security, and adding beds to already established locations.
The
firm also drives growth through joint ventures with larger health systems and
non-for-profits. Depending on the needs of the other party, Acadia utilizes
their expertise to retrofit or develop entirely new psychiatric facilities.
Much like the increased bed count, these relationships give the firm instant
access to a much larger customer and referral base. ACHC currently has 10
projects like this in the works. Joint Ventures and acquisitions have been
accretive in other ways besides increasing the customer base. For instance,
ACHC just acquired the behavioral health segment and psychiatrist development program
from the Einstein Medical Network last spring. With a market wide shortage of
available psychiatrists, ACHC will have the option place graduates into their
facilities as they see fit.
Looking
forward, management believes the firm will generate $8 billion in annual
revenue by FY2018, almost twice the estimate for FY16. Success will be directly
proportional to the amount of beds the firm can successfully add to their
existing and “newly acquired” facilities. Each facility has a development team
tasked with handling the operations, requesting new beds if needed, and
forecasting any potential change service demand. With management spending more
time on acquisition targets, this group is absolutely vital to the success of
the firm’s underlying operations going forward.
In
light of the recent Planned Parenthood shooting in Colorado Springs, much
attention has been directed towards our Nation’s insufficient mental health
system. In recent years, there has been an increase in both mental health
awareness and availability of treatments, hence ACHC’s aggressive acquisition
strategy. Reimbursement rates have been strong amidst an otherwise uncertain
regulatory environment. Medicaid laws prohibit the use of funds to finance
payments to metal health and substance abuse facilities. Currently, legislation
is in place to provide mental health coverage to adult Medicaid beneficiaries.
Although the bill’s status is unknown at the moment, successful passage could
increase their addressable market. It will be interesting to see how the
affects, if any, on the companies bottom life in the months to come.
There
has been much speculation in the market as to whether or not Acadia is
attempting to buy the Priory Group, Britain’s largest rehab clinic with a bed
count of over 7,000. To put things into perspective, each bed costs ACHC about
$125,000. At the current rate of 500 beds/year, it would take ACHC about
fourteen years and $875MM to grow organically to this magnitude. An acquisition
of this magnitude would materially affect EPS and shareholder value. Although this
transaction is currently speculation, the information may be “relevant” enough
to the point that it could be priced into ACHC stock.
What has the stock done lately?
The
stock is currently trading for around $61, down 12% from a month ago - and near its 9 month low. Trading
volume remains steady despite the stock’s overall negative returns. Short
interest has increased a bit (6.4% of float) compared to previous months. The
company has beaten earnings estimates for the past three quarters. The most
recent consensus target price on this stock is about $89.13, representing a 48%
upside when compared to the current price. Considering the current stock price
and the increase in short interest, a positive catalyst is defintley needed to
spark an increase in ACHC’s share price.
Past Year Performance: Earlier this year, two venture capital
firm sold about 4.8MM shares at an average price of $80. The stock price has
since dropped by about 33%. Despite the recent poor returns, ACHC has increased
3% in value over the past year. The company is on track to meet Q4 earnings and
sales estimates and there has been no major news to suggest any fundamental issues with the firm.
More
mergers, joint ventures, and acquisitions are definitely a huge positive for
a shareholder that may be concerned with the sustainability of ACHC’s business
model. With that being said, bed expansion is one of the most important drivers
of growth. Based on past results, it’s unlikely that we will see management cease
their expansion strategy in the near future. The firm is defintley broadening
their reach and expanding their service portfolio. In FY 2016 we should hear
something with regards to the Medicaid mental health exclusion. However, there
seems to be a bit of suspicion with regards to the outlook for the industry in an election year. A short interest of
6% isn’t all that worrying, but the increase from previous months should be
noted. Lastly, it’s worries me that the reasoning behind the major recent
selloff remains unknown. For these reasons, despite the attractive price, I would approach this stock with
caution unless you believe that the consensus estimates are accurate and have a strong opinion that there will be a supporter of behavioral health care expansion in the White House in 2016!
