(ACHC) provides inpatient behavioral health care services,
including psychiatric and chemical dependency services. The stock
became a Zacks #1 Rank this month after significant bumps in
analyst earnings estimates for this year and next, with 2014 EPS
projections moving up to $1.44 from $1.30, representing 34% annual
And 2015 estimates were lifted to $1.96 from $1.58 in the past two
months, equivalent to 37% annual EPS growth. Analysts have become
much more optimistic about the company as its strategies of both
organic and M&A-based growth are bearing fruit.
With a mix of inpatient psychiatric hospitals, residential
treatment centers, outpatient clinics and therapeutic school-based
programs Acadia Healthcare has a comprehensive approach to helping
people overcome debilitating mental and substance abuse issues.
Clearly this is an area in our society that is seeing more patients
and need for quality care, not less. And the tailwinds of the
Affordable Care Act (ACA) are supporting growth in this company's
Acadia Healthcare has acquired about 1,700 beds from the spree of
seven acquisitions executed in the past 15 months. The latest
acquisition of Partnerships in Care (PiC) last month alone added
1,200 beds, thereby appreciating inpatient volumes. The addition of
PiC also impelled an earnings accretion of 17-18 cents per share,
before expenses. Management now expects EPS of $1.44-1.46 in 2014,
up from prior estimate of $1.26-1.29.
The acquired and the organic bed expansion along with smooth
execution of the ACA policies are expected to drive meaningful
growth for the company going forward, as reflected by enhanced
EBITDA margin in first-quarter 2014. Although higher debt remains a
concern, steadily improving cash flows are likely to support
Here's how Baird analysts view this specialty hospital, as they
recently raised their EPS outlook and price target from $56 to
"ACHC remains our top growth idea based on superior
organic/M&A-driven growth, under-appreciated ACA upside/policy
tailwinds, and lower reimbursement risks. Our $60 price target is
derived by applying a 30x P/E multiple to our 2016 estimate. We
justify that multiple as reasonable based on our belief that ACHC
should be capable of growing earnings 30%+ over the next 2-3 years
if it can execute on its development strategy."
ACA: Growing Pains and Progress
After all the opposition and lobbying to annul the law, the
multi-year implementation of ACA is finally reflected in positive
signs from healthcare providers (in the form of improved earnings),
consumers (higher enrolments) and the market (wider coverage at
lower healthcare spending). This paves the way for affordable
healthcare facilities and expanded coverage for patients with
pre-existing health conditions, while also bringing about 32
million uninsured citizens under the coverage umbrella.
The U.S. bears the highest health expenditures in the world at
about 18% of its GDP. The Centers for Medicare and Medicaid
Services (CMS) further expects this to rise to about 20% of GDP by
2022, thereby anticipating a sea-change in the dynamics of the
healthcare industry over the next few years.
The Impact On Hospitals
The ACA is making the consumers stronger and the hospital industry
can no longer cherry-pick their customers. Additionally, the
hospitals are acclimatizing to payment reductions and wild price
discriminations due to government insurance programs like the
Medicare, Medicaid and online insurance exchanges.
And hospitals are keener to join forces with doctors and insurers
for healthy competition and to serve their customers better, which
will translate into higher admissions. Alongside, the reduction
witnessed in uninsured patients owing to ACA are also expected to
drive revenue-per-admission and bottom line for hospitals going
forward, while also increasing protection and lowering costs for
Meanwhile, higher enrollments will also likely propel growth in
demand for healthcare services, whereby the insureds are expected
to increase by about 12 million this year. This will further drive
the over-$3 trillion healthcare industry. As well, the reforms
under ACA will go a long way toward reducing bad debt problems
associated with hospitals.
Given this backdrop for the sector, Acadia Healthcare is a prime
pick in a key care niche. And the stock looks poised for a move
above $48 which would target its all-time highs near $54.
Disclosure: I own ACHC shares for the Zacks FTM Portfolio.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs
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