Acadia Healthcare: 2017 Was No Good, Will 2018 be Better?

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The year gone by was a dull one for Franklin, TN-based Acadia Healthcare Company Inc.ACHC that provides behavioral health care services in the United States and the United Kingdom.

What Were the Drags in 2017?

This behavioral healthcare company is faced with anemic U.K. operations, which is suffering from low census and a tightening labor market for nurses and other clinical staff. These factors caused a 9.5% and 21% decline in the segment's revenues and EBIDTA, respectively, for the first nine months of 2017.

In the face of continued volume challenges and high operating costs, the reduction in guidance was disappointing. For 2017, it now expects revenues between $2.82 billion and $2.83 billion (versus $2.85 billion and $2.87 billion), and EPS in the range of $2.23 to $2.25 (versus $2.42 to $2.47).

Another concern is its high leverage. The company's long-term debt has increased consistently for the past many years, leading to an increase in interest expense. At the end of 2016, long-term debt increased 48% year over year to $3.25 billion. Though it moderated slightly to $3.23 as of Sep 30, 2017, it remains at high levels. Its debt-to-capital ratio remains to the south of 55%. Such high debt levels may limit the company's expansion plans and aggravate risks. Higher interest expense on debt is also expected to impact profits.

These headwinds have weighed on its stock which lost 0.8% in 2017, underperforming the industry 's growth of 6.4%. Its performance pales all the more, relative to other players in the same space like HCA Healthcare Inc. HCA and UnitedHealth Services Inc. UHS , which gained 18.7% and 6.6%, respectively.

Will 2018 be Better?

We do not expect any improvement in the company's U.K. operations in the near term. Management anticipates pressure in the labor market to continue due to uncertainty around Brexit which is discouraging healthcare workers from coming to the country, consequently forcing the company to rely more on agency labor to fill its open positions.

Also, the low admissions witnessed in the third quarter did not show up in October, making management to expect soft volumes in the fourth quarter.

Zacks Rank and Stocks to Consider

Acadia Healthcare carries a Zacks Rank #4 (Sell). A better-ranked stock in the healthcare sector is Centene Corp. CNC . The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Centene zoomed past estimates in each of the four reported quarters, with an average positive surprise of 10.6%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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