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Reasons to Add Acadia Healthcare (ACHC) to Your Portfolio

Acadia Healthcare Company, Inc. ACHC is benefiting from the rise in demand for its behavioral healthcare services, driven by the growing incidence of mental health and substance use issues.

The company’s shares have rallied 21.9% so far this year against the industry’s decline of 3.9%.

The company currently carries a Zacks Rank #2 (Buy) and a VGM Score of B. 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.

Other stocks in the same space like Community Health Systems Inc. CYH has soared 196.6% while Avita Medical Ltd. RCEL and HCA Healthcare Inc. HCA have lost 51.5% and 1.2%, respectively.

Factors Favoring Acadia Healthcare

Q3 Earnings Beat: Acadia Healthcare's earnings of 68 cents per share beat the Zacks Consensus Estimate by 23.64% and also surged 30.8% year over year,  driven by enhanced demand across all segments and cost-saving actions.

Earnings Surprise History: The company’s bottom line surpassed estimates in each of the trailing four quarters, the average being 20.84%.

Upward Estimate Revision Activity: The Zacks Consensus Estimate for the company’s fourth-quarter 2020 earnings has moved north 6.1% and 9% north, respectively, over the past 30 days. Also, earnings estimates for the next year have inched up 2.4% in the past seven days.

Positive Growth Estimates: The Zacks Consensus Estimate for 2020 bottom line is currently pegged at $2.3, indicating growth of 12.75% from the year-ago reported figure. The same for 2021 stands at $2.61, suggesting an improvement of 13.56% from the prior-year reported figure.
The stock has an estimated long-term earnings growth rate of 12.8%, higher than the industry average of 9%.

Growth Drivers

The COVID-19 global pandemic left a profound impact on the mental health of the individuals. The ongoing uncertainties and socio-economic concerns continue to contribute to demand for the company’s services, especially for those already struggling with behavioral health concerns and addictions apart from the added isolation and anxiety caused by the prevalent coronavirus.Notably, during the third quarter, the company experienced strong top-line growth with revenues rising 7.2% from the prior-year level, reflecting robust demand for its behavioral health services.
The company is also using telehealth capabilities, wellness checks and crisis hotline to reach its patients.

Acadia Healthcare is also noticing a significant improvement in its cost-management efforts and operating efficiencies that were implemented in 2019 and 2020, respectively. The company recognized $4.6 million worth of savings in the third quarter of 2020, attributable to the cost-controlling initiatives taken in 2019.

It is also on track to achieve a run rate of $20 million by this year-end.
Also, expansion of beds at its existing facilities as well as new facilities will contribute to growth. During the first nine months of 2020, the company added 206 beds to its U.S. operations and expects to add approximately 100 more in the fourth quarter.

Acadia Healthcare has been generating positive cash flow from operations over the years. The metric skyrocketed 121% in the first nine months of 2020. Consistent cash generation provides the company with ample scope to pursue acquisitions and financial flexibility to chase growth-related activities.

The company also commenced the sale of its U.K. Business, which is one of its strategic steps undertaken to enhance profitability and achieve growth by focusing on more lucrative business. The business to be divested has been underperforming over the years and affecting growth. This bodes well for the healthcare provider as the funds to be generated from this sale will likely be utilized in improving its debt position.

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