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Acadia Healthcare (ACHC) Up 54% in 6 Months: More Room to Run?

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Acadia Healthcare Company, Inc. (ACHC - Free Report) has been in investor’s good books on the back of growing demand for its behavioral healthcare services. This demand is driven by a rise in the incidence of mental health and substance use issues.

The stock has surged 54% in the past six months’ compared with the industry’s growth of 38.8%. Other stocks in the same space like Community Health Systems Inc. (CYH - Free Report) and HCA Healthcare Inc. (HCA - Free Report) have also gained 158% and 54.3%, respectively, while Avita Medical Ltd. (RCEL - Free Report) has lost 36.2% over the same frame.

Though the company suffered weakness in patient volumes at the outset of the pandemic in March 2020, situation thereafter has improved with the reopening of economy and the government’s relaxation of restrictions. Business volumes will further improve with the positive vaccine development updates. During the three months ending Sep 30, 2020, the company was able to achieve encouraging growth in its EBITDA margin from its continued focus on cost management and operating efficiencies.

The COVID-19 global pandemic profoundly impacted the mental health of the individuals. The ongoing economic volatility and societal concerns continue to contribute to demand for the company’s services, especially for those already struggling with behavioral health and addiction issues and the aggravated isolation and anxiety problems caused by the deadly coronavirus.

Notably, during the third quarter of 2020, the company experienced strong top-line growth with revenues increasing 7.2% from the prior-year reading, reflecting robust demand for its behavioral health services.

The company is also using telehealth capabilities, wellness checks and a crisis hotline to reach out to its patients.

It is also witnessing measurable improvement owing to its cost-containment moves and the strategic steps to achieve operational excellence. All these were implemented in 2019 and 2020. The company recognized $4.6 million worth of savings in the third quarter as a result of its 2019 cost-saving initiatives. And it is on track to achieve a run rate of $20 million by 2020 end.

Also, the expansion of beds at its existing as well as new facilities will aid growth. During the first nine months of 2020, the company added 206 beds to its U.S. operations and expects to add approximately 100 beds in the fourth quarter.

Acadia Healthcare has been generating positive cash from operations over the years. The same surged 121% in the first nine months of 2020. Consistent cash generation provides the company with ample scope for acquisition pursuits and financial flexibility to chase growth-related activities.

The company also commenced the sale of its U.K. business, which seems a strategic fit to improve profitability and achieve growth by focusing on more profitable operations. The said business has been underperforming over the years and negatively impacting growth. This bodes well for the healthcare provider as the funds generated from this divestment are likely to be utilized to lower its debt load.

We believe, the stock will continue to grow, banking on the recovery of its business volumes, cost-cutting efforts, business streamlining and balance sheet strength.

The company currently carries a Zacks Rank #2 (Buy) and a VGM Score of A. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best investment opportunities.. You can see the complete list of today’s Zacks #1 Rank stocks here.

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