5 Factors That Make Acadia Healthcare Stock Look Unattractive

Acadia Healthcare Company, Inc.’s ACHC underperformance in U.K. market, rising expenses and a highly leveraged balance sheet continue to drag the stock down.

This Zacks Rank #4 (Sell) stock has declined 29% in a year’s time compared with the industry’s fall of 11.4%. Shares of other companies in the same space such as Community Health Systems, Inc CYH, and HCA Healthcare, Inc HCA have fallen 6.3% and 4.1%, respectively. Nevertheless, shares of Universal Health Services, Inc. UHS have gained 18.3% during the same time frame.You can see the complete list of today’s Zacks #1 Rank stocks here.

Acadia Healthcare has witnessed a downward revision in the Zacks Consensus Estimate for 2019 and 2020 over the past 60 days, which reflects analysts’ pessimism toward the stock. For the current year, the company’s earnings are expected to decline by 4.5% compared with the industry’s anticipated decline of 0.7%.  

Factors Weighing Down the Stock

Rising Expenses: The company has been witnessing increase in expenses since 2009, resulting in margin contraction. This has also resulted in eroded earnings per share. During the first half of 2019, expenses rose 4.5%. It remains a concern, given that this increase in expenses outpaced revenue growth of 2.5%. The company’s expenses would remain elevated as it continues to invest in inorganic growth strategies, which might drag margins.

High Debt: The company’s leverage as measured by debt-to-equity ratio has been rising consistently over the years. Its debt-to-equity ratio of 155% is higher than the industry average of 104%. This has also led to an increase in interest expenses, which rose 6.3% year over year in the first half of 2019. Its high leverage raises financial risks and weighs on margins.

U.K Business Under Pressure: The company’s U.K. business remains challenged with weak census and pressure related to nurse staffing. Revenues from this segment have been volatile over the past many quarters. In the first half of 2019, EBIDTA margins declined 395 basis points year over year. Though a number of initiatives have been undertaken to address the labor issue and to increase the census, we would be on the sidelines till results reflect the same.

Weak Bottom-line Guidance: Acadia Healthcare has lowered its earnings guidance. It now expects EBITDA of $610 million to $620 million and adjusted earnings per share in the range of $2.15 to $2.23. The expected EBITDA and EPS indicate year-over-year decline of 35% and 2.2%, respectively, (calculated at the mid-point). The current guidance suggests earnings decline for the third year in a row.

Declining Profitability: Acadia Healthcare’s return on assets, an indicator of how efficiently a company uses its assets, has also gone down to 140 basis points over the past four years and compares unfavorably with the industry average of 6.5%.

Nevertheless, the company’s strong presence in the United States,  solid inorganic growth and a strong balance sheet continues to favor it.  Focus on addition of beds and cost-control measures should support its results.

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