Acadia Healthcare (ACHC - Snapshot Report) provides inpatient behavioral health care services, including psychiatric and chemical dependency services. The stock became a Zacks #1 Rank in July after significant bumps in analyst earnings estimates for this year and next, with 2014 EPS projections moving up to $1.44 from $1.30, representing 34% annual growth.

And 2015 estimates were lifted to $1.96 from $1.58 over the summer, equivalent to 37% annual EPS growth. But this was all before the company reported Q2 earnings in late July.

Since the company exceeded expectations in that report, including a 23% increase in year-over-year EPS on a 20% boost to the top line and an 11.5% jump in same-facility revenue, analysts have become much more optimistic about the company as its strategies of both organic and M&A-based growth are bearing fruit.

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 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.

Here's how Baird analysts viewed this specialty hospital before their last earnings report, as they recently raised their EPS outlook and price target from $56 to $60...

"ACHC remains our top growth idea based on superior organic/M&A-driven growth, under-appreciated ACA upside/policy tailwinds, and lower reimbursement risks. Our $60 price target is derived by applying a 30x P/E multiple to our 2016 estimate. We justify that multiple as reasonable based on our belief that ACHC should be capable of growing earnings 30%+ over the next 2-3 years if it can execute on its development strategy."

And here was the Baird update in late July, where analysts noted the "exceptional quarter" that they saw as much better than the headline...

"2Q results further highlight ACHC's exceptional growth model, highlighted by +11.5% SS revenue growth and +20% y/y EBITDA growth. Some may nit-pick the in-line 2Q EPS; however, this is entirely due to Street mis-modeling of the PiC-related equity offering and it's fairly well understood by investors. ACHC remains one of our top growth ideas, and we can see a pathway towards a +$75/stock, assuming ACHC can sustain +30% EPS growth on the out-year (before ACA/MHP tailwinds)."

ACA: Growing Pains and Progress

After all the opposition and lobbying to annul the law, the multi-year implementation of ACA is finally reflected in positive signs from healthcare providers (in the form of improved earnings), consumers (higher enrollments) and the market (wider coverage at lower healthcare spending). This paves the way for affordable healthcare facilities and expanded coverage for patients with pre-existing health conditions, while also bringing about 32 million uninsured citizens under the coverage umbrella.

The U.S. bears the highest health expenditures in the world at about 18% of its GDP. The Centers for Medicare and Medicaid Services CMS further expects this to rise to about 20% of GDP by 2022, thereby anticipating a sea-change in the dynamics of the healthcare industry over the next few years.

The Impact On Hospitals

The ACA is making the consumers stronger and the hospital industry can no longer cherry-pick their customers. Additionally, the hospitals are acclimatizing to payment reductions and wild price discrimination due to government insurance programs like the Medicare, Medicaid and online insurance exchanges.

And hospitals are keener to join forces with doctors and insurers for healthy competition and to serve their customers better, which will translate into higher admissions. Alongside, the reduction witnessed in uninsured patients owing to ACA are also expected to drive revenue-per-admission and bottom line for hospitals going forward, while also increasing protection and lowering costs for patients.

Meanwhile, higher enrollments will also likely propel growth in demand for healthcare services, whereby the insureds are expected to increase by about 12 million this year. This will further drive the over-$3 trillion healthcare industry. As well, the reforms under ACA will go a long way toward reducing bad debt problems associated with hospitals.

In July when I bought ACHC shares for the Zacks FTM portfolio, I had this to say...

"Given this backdrop for the sector, Acadia Healthcare is a prime pick in a key care niche. And the stock looks poised for a move above $48 which would target its all-time highs near $54."

We got that move above $48, but since then the stock has flirted twice with a break back above $52, only to run into the September roll-over of the broad market where small and mid cap growth stocks are getting thrown out with the bath water. Back under $48, I expect ACHC to find healthcare-focused growth investors to be very interested in the shares again.