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Here's Why Hold Strategy is Apt for Acadia Healthcare Stock

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Acadia Healthcare Company, Inc. (ACHC - Free Report) has been gaining momentum from expanding telehealth services, intense focus on solving mental health issues and robust cash generating abilities.

The stock has seen its estimates for 2020 and 2021 move up 10.2% and 3.4%, respectively, in the past 30 days. The expected long-term earnings growth rate is 11.8%, better than the industry’s average of 7.7%.

The Zacks Consensus Estimate for its 2020 and 2021 earnings per share is pegged at $2.05 and $2.44, respectively, indicating an improvement of 0.4% and 19.4% from the year-ago reported figure.

Further, the company has a trailing four-quarter earnings surprise of 14.45%, on average.

Factors Driving Acadia Healthcare

This Zacks Rank #3 (Hold) healthcare provider continues to benefit on the back of higher revenues that have witnessed a five-year (2014-2019) CAGR of 25.3%. Patient volumes, which were initially impacted by the pandemic, have certainly rebounded by certain extent in July following easing of restrictions by the government.

The company has been expanding its telehealth facilities for offering enhanced healthcare services to its patients, which bodes well in the light of the ongoing COVID-19 pandemic. Observance of stringent social-distancing measures on account of the novel coronavirus has led to a spike in the demand for telehealth services.

This uptrend is likely to drive the company’s revenues in the days ahead. This is evident from the Zacks Consensus Estimate for its 2020 and 2021 revenues, which are pegged at $3.14 billion and $3.38 billion, respectively, indicating an improvement of 1.2% and 7.4% from the year-ago reported figure.

Acadia Healthcare has been banking on buyouts to drive performance, and is one of the primary factors aiding the top-line growth consistently. Through acquisitions, the company has added facilities, beds and hospitals to its network, which in turn, has enabled it to enhance its services suite and add scalability to business. In the first half of 2020, it has added 106 beds to its U.S. operations.

Notably, the healthcare provider has been intensifying focus on catering to mental health issues across the United States, which have further aggravated owing to the ongoing worldwide crisis. Case in point, Acadia Healthcare formed a joint venture (JV) with Tower Health last month and announced the opening of Tower Behavioral Health containing 144 beds. The new health hub will not only take care of individuals suffering from mental health disorders but also has plans to include age-appropriate units for delivering inpatient psychiatric care to children and adolescents.

The company had made a similar move in June, when it collaborated with Covenant Health for resolving mental health issues in East Tennessee. Notably, the issues in the region remain quite unaddressed due to the dearth of resources in the state.

Furthermore, Acadia Healthcare boasts a robust balance sheet with strong cash balance and access to about $500 million of credit facility. It exited the second quarter with total cash and cash equivalents of $212 million, which is sufficient to cover the company’s short-term debt obligations. The total debt to total capital of 59.2% at second-quarter end remains lower than 59.5% at 2019-end.

Robust cash flow, which soared 106% year over year in the first half of 2020, has been providing ample opportunities to undertake acquisitions and other growth-related initiatives.  

Shares of this healthcare provider have gained 15.4% in a year compared with the industry’s growth of 3.4%.

However, we remain concerned about the company’s high debt levels, which puts a strain on its sound financial position. Nevertheless, we believe that the company’s strong fundamentals will help it to perform consistently well in the days ahead.

Stocks to Consider

Some better-ranked stocks in the medical space include Select Medical Holdings Corporation (SEM - Free Report) , Emergent BioSolutions Inc. (EBS - Free Report) and The Ensign Group, Inc. (ENSG - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Select Medical, Emergent BioSolutions and Ensign Group have a trailing four-quarter earnings surprise of 212.61%, 127.41% and 17.87%, on average, respectively.

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