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Zacks’ Bull Of The Day: Acadia Healthcare

Acadia Healthcare (NASDAQ:ACHC) provides inpatient behavioral health care services, including psychiatric and chemical dependency treatment. They also run therapeutic school-based programs.

The stock has consistently been a Zacks #1 Rank since July for two reasons that cause analysts to keep raising earnings estimates: strong organic and acquisitive growth.

Here’s what I wrote in early October when Acadia was featured as Bull of the Day and shares were trading at $47.53…

Specialty Care Trends

With a mix of inpatient psychiatric hospitals, residential treatment centers, outpatient clinics and therapeutic school-based programs Acadia Healthcare has a comprehensive approach to helping people overcome debilitating mental and substance abuse issues.

Clearly this is an area in our society that is seeing more patients and greater need for quality care, not less. And the tailwinds of the Affordable Care Act (ACA) are supporting growth in this company’s programs.

Buying Growth

Acadia Healthcare has acquired about 1,700 beds from the spree of seven acquisitions executed in the past 15 months. The latest acquisition of Partnerships in Care (PiC) last month alone added 1,200 beds, thereby appreciating inpatient volumes. The addition of PiC also impelled an earnings accretion of 17-18 cents per share, before expenses. Management now expects EPS of $1.44-1.46 in 2014, up from prior estimate of $1.26-1.29.

The acquired and the organic bed expansion along with smooth execution of the ACA policies are expected to drive meaningful growth for the company going forward, as reflected by enhanced EBITDA margin in first quarter 2014. Although higher debt remains a concern, steadily improving cash flows are likely to support leverage.

Another Strong Quarter, Another Acquisition

On October 29, Acadia reported top and bottom line beats and raised guidance. This was the company’s second consecutive earnings and revenue beat, posting a 2-quarter average positive surprise of 48%. The upbeat guidance was largely due to an important acquisition of a private competitor operating in 21 states that will make Acadia the largest behavioral care provider in the country.

Here’s what I wrote that evening to my FTM members who own the stock…

ACHC gave a 5-cent beat and raised guidance on higher “same bed sales” (sorry, I couldn’t resist) and just more beds in general. The company also announced a key acquisition of the privately-held CRC Health Group for $1.175 billion, the nation’s largest specialized behavioral healthcare provider based in Cupertino, California.

And here’s a description of this key acquisition from the company press release…

CRC provides substance abuse treatment and other specialty programs through 36 residential facilities and 84 comprehensive treatment facilities that currently treat approximately 40,000 patients daily. These facilities are expected to produce aggregate revenues for 2014 of approximately $450 million and adjusted EBITDA of approximately $115 million. Consideration for the acquisition of privately held CRC is $1.175 billion, consisting of up to approximately 6.3 million shares of Acadia’s common stock and the assumption of CRC’s debt. We expect to complete this accretive transaction, which is subject to normal closing conditions, in the first quarter of 2015.

Analysts were quickly raising estimates and price targets following this news, with the FY14 Zacks Consensus moving to $1.52 from $1.46 and FY15 from $1.97 to $2.18.

Deutsche Bank analysts raised their price target to $72, while RBC Capital Markets bumped theirs to $78. And analysts at Baird reiterated their Outperform rating and moved their PT from $60 to $70, citing…

3Q results further highlight ACHC’s enviable growth model and the upside potential from M&A. UK-based PiC seems to be tracking well ahead of expectations, and we figure the pending CRC acquisition is at least 10-20% accretive to EPS. Skeptics nitpick the substance abuse subsector as “non core,” but we think that is short-sighted and ignores an expanding addressable market supported by numerous policy tailwinds (similar themes to IP psych). ACHC remains one of our top growth ideas.

Institutions Check In

One of my primary catalysts for stock selection in the Zacks Follow the Money (FTM) Trader is institutional buying. When we originally bought shares in July we did so because of strong net institutional buying in Q1.

That pattern continued in Q2 and more recently in Q3 with existing holders adding a net 1.9 million shares. Plus, we had two big new buyers with Eagle Asset Management capturing 818,344 shares and Sabby Management grabbing 663,324.

Some investors have worried lately that the Affordable Care Act, which has benefited hospitals so much this year, will face bigger headwinds next year as a looming Supreme Court decision awaits in June.

Clearly, the big investors still accumulating Acadia shares aren’t too worried about this specialty hospital’s growth, with or without Obamacare.

According to, which measures analysts’ and bloggers’ success rate based on how their calls perform, blogger Zacks Investment Research has a total average return of 0.6% and a 52% success rate. Zacks Investment Research is Ranked #1545 out of 4041 Bloggers

ACADIA HEALTHCARE: Free Stock Analysis Report  

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