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Acadia Healthcare Up 32% YTD: What's Driving the Rally?

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Acadia Healthcare Company, Inc. (ACHC - Free Report) has been in investors’ good books, given its strong presence in the United States and U.K., a solid balance sheet and continued inorganic growth.

Year to date, the stock has gained 32% compared with the industry’s growth of 4%. It has witnessed an upward revision in 2019 earnings estimates over the past 30 days.


Factors Favoring the Stock:

Leading platform in healthcare industry: The company is a leading behavioral healthcare platform in an industry that is undergoing consolidation in an effort to reduce costs and expand programs to better serve the growing need for inpatient behavioral healthcare services.

Management expects to take advantage of strategies that are more accessible as a result of the company’s increased size and geographic scale. These strategies include a national marketing strategy to attract new patients and referral sources, increase its volume of out-of-state referrals and provide a broader range of services to new and existing patients and clients, and selectively pursue opportunities to expand its facility and bed count in the United States and U.K.

Strong free cash flow generation: The company generates strong free cash flow by profitably operating its business and by actively managing its working capital. Moreover, as the behavioral healthcare business does not typically require the procurement and replacement of expensive medical equipment, the maintenance of capital expenditure requirements are generally less than that of other facility-based healthcare providers. For the year ended Dec 31, 2018, the company’s maintenance capital expenditures amounted to approximately 2.5% of its revenue.

Opportunistic acquisitions and partnerships: The company has positioned itself as the leading provider of mental health services in the U.S. and the U.K. The behavioral healthcare industry in the U.S. and the independent behavioral healthcare industry in the U.K. are highly fragmented.

The company seeks opportunities to expand and diversify its base of operations by acquiring additional facilities and entering into partnerships with healthcare providers to develop additional facilities. Per the company, there are a number of acquisition candidates available at attractive valuations, which indicates a number of joint ventures and buyouts in the future.

Drive organic growth of existing facilities: The company continues to boost organic growth by providing a broader range of services to new and existing patients and clients. In addition, management intends to increase bed counts in existing facilities. During the year ended Dec 31, 2018, the company added 651 beds, including 499 added to existing facilities and 152 added through the opening of two de novo facilities. For the year ending Dec 31, 2019, it expects to add approximately 700 total beds exclusive of acquisitions.

Despite concerns such as pressure on its U.K business and increase in expenses, the tailwinds facing the stock should support its rally in the coming quarters.

Acadia Healthcare carries a Zacks Rank #3 (Hold). Other companies in the healthcare space are The Ensign Group, Inc. (ENSG - Free Report) , Brookdale Senior Living Inc. (BKD - Free Report) and Genesis Healthcare, Inc. , each carrying a Zacks Rank #2 (Buy).

Ensign has surpassed estimates in each of the four reported quarters with an average positive surprise of 3.1%.

Brookdale posted positive earnings surprise in three of the four reported quarters with an average positive surprise of 11.06%.

Genesis Healthcare’s 2019 earnings estimate has gone up over the past thirty days, and implies a growth of 53.55% year over year.

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