Acadia Healthcare Down For Second Year, What Awaits In 2019?

Franklin, TN-based Acadia Healthcare Company, Inc. (NASDAQ:ACHC) has been out of favor with investors in recent years due to its operating headwinds that have been weighing on its profitability.

The stock has lost close to 4.3% in 2016, 2% in 2017 and 4.4% year to date compared with the industry’s growth of 31.5%.

The stock’s performance looks all the more pale in comparison to the gains recorded by the other players in the space like HCA Healthcare, Inc. (NYSE:HCA) , Universal Health Services, Inc (NYSE:UHS) and Community Health Systems, Inc. (NYSE:CYH) that were up 52.6%, 12.32% and 6.1%, respectively.

What Were the Drags in 2018?

This behavioral healthcare company is faced with pressure in its U.K. operations, which is suffering from low census and a tightening labor market for nurses and other clinical staff. This has created pressure on top line and escalated costs.

The census in the company’s existing healthcare business declined in the most recently reported quarter as it experienced a decrease in referrals from the NHS. Similar to industry trends, the company continues to experience difficulty in recruiting nurses and clinical staff, which requires it to utilize agency labor to fill those positions.

Because the company’s census is not reaching the levels sufficient enough to absorb higher wages and other operating cost, its margins and earnings are suffering.

Another niggling factor is the company’s high debt load, which pushes up risk related to high financial leverage. The company’s debt to EBITDA ratio is 5.2 compared with the industry average of 4.22.

Recently, Moody’s changed its ratings outlook on the company to negative from stable due to challenges it is facing with profit margins in its U.K. business.

The negative outlook was also reflective of the company’s inability to bring down its debt-to-EBITDA level, unless profitability of its U.K. operations improves. The rating agency is also concerned about reduction in the cushion cover under the company's bank credit facility covenants if Acadia Healhcare does not achieve at least mid single-digits earnings growth.

Will 2019 Be Better?

The company expects continued difficulties resulting from nursing and clinical staff shortage for the foreseeable future in its U.K. business. Suppressed results from this segment, which accounts for nearly 40% of the company’s EDBITDA will weigh on its overall results and reflect in its share price.

The company is strategizing a rapid growth pace through strategic buyouts, opening of new facilities and addition of beds in the current facilities. This will be done via acquisitions. If these expansion plans are done by the use of debt, the company’s leverage ratio will further deteriorate, leading to a cause for concern.

The company has guided earnings per share for 2018 in the range of $2.25 to $2.27, which is lower than earnings of $2.30 per share reported in 2017.
Though the company’s U.S. business has been performing quite well, until these issues are addressed, the stock price of the company will likely remain under pressure.

The Zacks Rank #5 (Strong Sell) stock has witnessed a downward revision in earnings estimates for 2018 and 2019 by 1.3% and 2.8%, respectively, over the past 30 days. This reflects analysts’ pessimism over the stock and will keep stock price subdued. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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