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Acadia Healthcare (ACHC) Up 42% This Year: Is Upside Left?

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Continued strong demand for mental and behavioral health and support from government for increased funding for opioid addiction programs along with strong fundamentals have driven growth at Acadia Healthcare Co., Inc. (ACHC - Free Report) .

The same is reflected in the company’s share price, which has gained a whopping 42% year to date, significantly outdoing the mere 3% growth for the industry it belongs to.

Acadia Healthcare’s performance looks all the more superb when compared with the meager gain of 1.7% by another player, United Health Services, Inc. (UHS - Free Report) in the same space.

So what led the momentum in the stock?

Favorable Industry Trends

Acadia Healthcare, a behavioral health care company, has been favored by spending on behavioral health services that has more than doubled in a decade. The company has witnessed an increase in the number of patient growth after the passage of the Mental Health Parity and Addiction Equity Act by Congress in 2008. The act required health plans and insurers to pay for addiction and mental illness treatment just as they would for cancer or cardiovascular care.

Cases of behavioral and substance abuse is on the rise, which has resulted in an increased number of deaths related to this. Given the fragility of the case, it seems that new regulations in process (under Trump’s presidency) should support the industry by providing greater patient access to care, growing awareness of treatment options, and solid long-term pricing support. This should driving sales and demand for the company’s services.

Strong Fundamentals

Other than industry-specific factors, the stock is gaining from the company’s strong performance. Its U.K. and U.S. facilities have been performing favorably and witnessed an increase in patient admission, revenue per patient and number of patient days. The company’s  superior operating performance its evident from its revenues, which witnessed a CAGR of 67% from 2011-2016. Along with top-line growth, the bottom line has also seen an impressive CAGR of 39.34% from 2012-2016.

Management’s ability to execute on inorganic growth strategies has paid off. We favorably view the company’s extensive plans for bed expansion. The company added 91 beds in the second quarter and expects to add 800 this year. While a quarter of these additions will stem from a joint venture in Louisiana, Virginia and Arkansas, the rest will come from business expansion. Management also believes that bed expansion can accelerate over the next 3-5 years.

The company made a number of acquisitions in the past that have amplified its growth. It is continuously seeking acquisitions, primarily in the U.S and remains open to joint ventures. More importantly, Acadia Healthcare is a sought-out partner for acute care hospitals.

Acadia Healthcare’s ambitious growth plans are supported by its strong capital position. In 2016, cash flow from operations was $371.7 million, up 50% year over year. The same was up 2.6% in the first half of 2017. Apart from pursuing acquisitions, the company plans to use excess cash to reduce debt.

Given the bunch of positives, we expect momentum in the shares of Acadia Healthcare to continue in the coming quarters.

Zacks Rank and Stocks to Consider

Acadia Healthcare carries a Zacks Rank #3 (Hold). Some better-ranked players in the health care space are Aetna Inc. (AET - Free Report) and WellCare Health Plans, Inc. (WCG - Free Report) . Both these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Aetna, one of the largest health benefits companies, beat estimates in each of the last four quarters, with an average positive surprise of 19%.

WellCare Health Plans provides managed care services targeted exclusively at government-sponsored healthcare programs. It beat estimates in each of the last four quarters, with an average positive surprise of 47.4%.

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