Bull of the Day: Acadia Healthcare

Acadia Healthcare (ACHC - Snapshot Report) is back to a Zacks #1 Rank as the company's latest and greatest acquisition will be immediately accretive to annual earnings by 15%. And some analysts are pretty sure that this company guidance is conservative.

Nashville-based Acadia is the leading specialty provider of behavioral health services in the US, and soon in the UK. They provide psychiatric and chemical dependency services, including inpatient psychiatric hospitals, residential treatment centers, outpatient clinics and therapeutic school-based programs.

On January 4, Acadia announced a $2.2 billion deal to buy the Priory Group, the UK's largest behavioral care provider managing over 300 facilities with 7,200 beds. Priory is known for being the addiction treatment and rehab locale for Britain's famous and wealthy.

A Reverse British Invasion

Acadia already owned the second-largest behavioral health group in the UK when they purchased Partners in Care (PiC) in 2014. Priory's 7,200 beds and PiC's 2,000 beds will have a combined market share of 30% in the UK mental health provider market.

To help finance the purchase of Priory, Acadia issued 10 million new shares of stock in a public offering at the price of $61. The Priory purchase price will consist of $1.9 billion in cash and $335 million of the newly issued equity, or 5.4 million shares. The companies expect to close this transaction by February 16, 2016.

So far, the share offering, which was priced on January 6, appears to be well-accepted by large investors as the stock has traded between $61 and $65 on strong volume since the pricing. This indicates willing demand by existing large shareholders and new investors.

It's also worth noting that the UK has much lower corporate tax rates: 20% in 2016, 19% in 2017 and there is a proposal to reduce that further to 18% by 2020.

Earnings Growth Trend

Acadia is on a stated mission to double their 2015 revenues of nearly $2 billion by 2018. Obviously, M&A is a key part of that strategy. But the company is also focused on organic growth and making their facilities a unique part of each community where families and individuals can seek healing from mental health or substance abuse issues.

If you go on the Acadia homepage, you'll see a nation-wide virtual tour of dozens of small, beautiful, one-of-a-kind care facilities tailored to the needs of each community. This focus on being a leading behavioral care provider in the US and the UK has created a consistent path of earnings growth.

Below is the Zacks proprietary Price & Consensus chart which plots changes in annual earnings estimates against the stock price...

As you can see, the steady trend of earnings growth has lifted ACHC shares handsomely in this bull market. And right now, they might just be undervalued as the upward analyst estimates revisions are only starting to roll in.

In other words, that gold line on top (the 2016 consensus) is about to make a sharp upward turn once the $0.40 in estimated annual earnings accretion gets added to current consensus estimates. This week, one investment bank took their 2016 estimate from $2.81 to $3.05, reflecting an assumed deal close in mid-February.

As of January 12, the 2016 consensus is only up a nickel to $2.82 in the past month. The rest of the analyst estimate revisions that are due to come have likely been waiting on confirmed details of the share offering and deal structure. They should hit the Zacks Detailed Estimate tables later this week.

ACA and Medicaid Tailwinds Persist

Here's what I wrote in a July 2015 article that featured Acadia as the Bull of the Day...

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 through the acquisition of over 2,500 beds in over two dozen facilities in the past year, Acadia has become the largest provider of these specialty services in the US and the UK.

With the recent Supreme Court decision to uphold the Affordable Care Act as the law of the land, healthcare providers, insurers, and patients have regained some degree of certainty about what the next few years will look like regarding care and how it gets paid for.

The level of certainty for hospitals was confirmed when stocks like Tenet Health (THC - Analyst Report) and HCA Holdings (HCA - Snapshot Report) soared last week on the SCOTUS vote.

While the Affordable Care Act may still become a political firebrand issue during this year's Presidential election, another fresh policy tailwind is coming up for Acadia. It is expected by several analysts that expanded Medicaid coverage for adult mental health will be announced this year. This will drive significant organic growth for Acadia and should "seal the deal" along with favorable UK NHS (National Health Service) policies to make the stock a strong buy near $60.

The average price target among six analysts for Acadia shares is over $90.