October 17, 2018
Institutional Research

Acadia Healthcare
(ACHC - $35.48)
A
Kevin Ellich
Senior Research Analyst
612-334-8228
kevin.ellich@craig-hallum.com

Acadia Healthcare is a facility-based behavioral healthcare company established in 2005 to
operate, develop and acquire behavioral healthcare facilities in both the U.S. and U.K.

OUR CALL

www.craig-hallum.com
Changes
Previous
Rating:
Buy
Fundamental Trend:
Price Target:
$44
FY17A Rev M:
FY18E Rev M:
$3,040
FY19E Rev M:
$3,244
FY17A EPS:
FY18E EPS:
$2.54
FY19E EPS:
$2.82
Profile
Price:
52 Wk Range:
$26.92
Avg Daily Vol:
Shares Out M:
Market Cap M:
Insiders Own:
Short Interest (M):
Book Value/Sh:
Est LT EPS Gr:
Dividend Yield (%):
Net Debt (M):
Net Debt/Sh:
Debt / Capital:
Year Ends:
Rev (M)
2017A
2018E
Mar
$679
$742A
Jun
$716
$766A
Sep
$717
$748
Dec
$725
$775
FY
$2,836
$3,030

P/E
EV/Revenue
EV/EBITDA
Management
CEO
President
CFO

Current
Hold
Mixed
$34
$2,836
$3,030
$3,213
$2.30
$2.52
$2.74
$35.48
- $45.27
2,811,210
87.5
$3,165
2.2%
12.3
$30.66
10%
0.0%
$3,142
$35.92
54.6%
Dec
2019E
$792
$810
$792
$819
$3,213

2017A
$0.46
$0.66
$0.58
$0.61
$2.30

2018E
$0.52A
$0.70A
$0.63
$0.67
$2.52

2019E
$0.55
$0.76
$0.69
$0.74
$2.74

15.4x
2.2x
10.4x

14.7x
2.1x
9.9x

13.0x
2.0x
9.3x

Joey Jacobs
Brent Turner
David Duckworth

Price Target: $34

Downgrading To HOLD Rating As Growth And Leverage Likely Cap
Valuation. Lowering Estimates, Price Target Reduced To $34.

Per Ostlund, CFA
Senior Research Analyst
612-334-6353
per.ostlund@craig-hallum.com

EPS *
Mar
Jun
Sep
Dec
FY
* Adjusted EPS

HOLD

We are lowering our rating on shares of Acadia Healthcare to Hold from Buy
as we believe the risk/reward is no longer compelling. We think the stock will
be range-bound due to: (1) the potential for growth to slow, (2) continued
uncertainty in the U.K., and (3) leverage on the balance sheet and rising
interest rates, which could negatively affect ACHC’s cost of capital in the
event that it decides to raise capital for future acquisitions. We also believe
competition could make it more difficult to fill beds and recently published
reports alleging abuse at ACHC facilities could heighten the regulatory
environment and/or change referral behavior and negatively affect occupancy
rates. We lowered our estimates and reduced our price target to $34.
KEY POINTS
Upside limited by a number of factors. We believe uncertainty around
Acadia’s growth could create an overhang on the stock and limit upside to
its valuation. Our view is based on the competitive environment as more
behavioral/psychiatric beds in the industry could make it more difficult to
increase occupancy rates. Coupled with the potential for fewer deals and
potential changes in referral behavior because of alleged patient abuse at
understaffed facilities, as well as limited visibility on growth and upside
to Street estimates, we think ACHC’s valuation will be range-bound.
U.K. uncertainty remains an issue. Last quarter, ACHC’s U.K.
operations generated 5.6% same-facility revenue growth, the best in two
years, however labor cost pressures continued to plague EBITDA margin
as salaries, wages & benefits expense increased 84 bps y/y. Despite
expectations for growth in the U.K. coming from bed additions, ACHC
still expects cost pressures from the labor shortages and use of temp
staffing. We think the labor cost pressure in the U.K. and general
uncertainty will continue until there is more clarity on Brexit in March
2019, which will make it difficult for the company to outperform
expectations. Recent U.K. results also haven’t instilled much confidence.
Leverage remains high, creating other risks. At the end of 2Q18,
ACHC’s debt/TTM EBITDA leverage ratio was 5.2x. In a rising interest rate
environment, we think the company’s leverage could make it more difficult to
raise capital, or at a minimum, increase its cost of capital to do more deals to
drive growth. With the higher leverage and limited visibility on growth, we
think ACHC’s valuation is capped.

Lower estimates and price target to $34. While ACHC operates in a
much needed and important industry, we think the increased risk profile
and higher leverage will limit the stock’s upside. Due to the competitive
landscape, we made minor adjustments to our occupancy rate assumptions
leading to lower revenue, EBITDA and EPS estimates. Based on this
outlook, we lowered our price target to $34 based on 9.0x our FY19
EBITDA estimate of ~$677M. Our target multiple is near the lower end of
ACHC’s historical FY2 EV/EBITDA valuation, which we believe is
justified given limited visibility on growth and ACHC’s high leverage.

SEE LAST PAGE FOR IMPORTANT DISCLOSURES

Page 1 of 5

 October 17, 2018

ACHC valuation likely capped. Historically ACHC’s trough FY2 EV/EBITDA
valuation is in the 7.5x to 9.0x range and with the current leverage of 5.2x and
rising interest rates, we think the stock’s valuation will be range-bound around
9.0x.
Historical FY2 EV/EBITDA
18x

16x
14x
12x
10x
8x
6x
4x
2x

4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18

0x

Source: FactSet Data Systems and Craig-Hallum Capital Group, LLC estimates

Leverage remains high. ACHC ended Q2 2018 with $3,188M of long-term
debt and $33M of short-term debt leading to a leverage ratio of 5.2x, down
modestly from 5.3x in 1Q18 and 5.4x in 2Q17. We think the company’s high
leverage in a rising interest rate environment will hamper its growth potential or
at least reduce its return on invested capital as the cost of capital will be higher.

Debt/TTM EBITDA Leverage
9.0x
8.0x

7.0x
6.0x
5.0x
4.0x
3.0x
2.0x
1.0x

0.0x

Source: FactSet Data Systems and Craig-Hallum Capital Group, LLC estimates

STOCK OPPORTUNITY
We are lowering our rating on ACHC to Hold from Buy and reducing our price target to
$34 (from $44) based on an EV/EBITDA multiple of 9.0x our revised 2019 EBITDA
estimate of $676.5 million (net debt ~$3,142M and 87.5M shares outstanding). Our target
EV/EBITDA multiple is a discount to ACHC’s historical FY2 average of ~11x, which we
think is justified given the potential for growth to decelerate coupled with the company’s
high leverage (~5x) in a rising interest rate environment. While we like the long-term
Acadia Healthcare Company, Inc.
Institutional Research

Page 2 of 5

 October 17, 2018

opportunity for the behavioral/psychiatric industry, we think ACHC’s leverage could
make it more difficult to raise capital, or at least, increase its cost of capital as the
company looks to do more acquisitions and the continued labor pressures in the U.K.
could lead to higher operating costs.

RISKS
We believe an investment in Acadia Healthcare involves the following risks:
Concentrated Shareholder Base. The top three shareholders of ACHC hold
over 30% of the shares outstanding. If they chose to materially reduce their
holdings, this may put downward pressure on the stock. Additionally, due to
ACHC’s limited float, this may add volatility to the stock.
Reimbursement. Acadia receives a large portion of its revenue from
government sources (Medicare, Medicaid, etc.). We are assuming modest pricing
growth from Medicaid. If states reduce the number of Medicaid beneficiaries or
reimbursement for behavioral health, this may adversely affect ACHC’s revenue
and margins.
Operational. Like most healthcare services companies that derive a large
amount of revenues from the government, there is a high level of operational
scrutiny. It is important for the management of Acadia to adequately staff their
facilities, bill for patient services correctly, maintain good recordkeeping, and
operate their facilities for the benefit of their patients.
Headline. Occasionally behavioral health facilities have negative news stories
written about them and this can put negative pressure on the stock price of these
companies. Sometimes there may be a government investigation opened to look
into the allegations further and this can create uncertainty for investors.
Interest Rates. Acadia frequently uses debt to finance acquisitions. We believe
that about half of the company’s debt has a fixed interest rate. However, if
general market interest rates rise for a sustainable period, this may increase the
interest expense for ACHC and adversely impact EPS growth.
Integration/Regulatory. With the acquisition of Priory Group, ACHC will be
exposed to certain integration and regulatory risks that they do not typically
experience in the U.S. If the company does not properly integrate Priory Group,
its profitability may suffer.

Acadia Healthcare Company, Inc.
Institutional Research

Page 3 of 5

 October 17, 2018

1Q17
3/31/17

2Q17
6/30/17

3Q17
4Q17
9/30/17 12/31/17
FY17
12/31/17

1Q18
3/31/18

2Q18
6/30/18

3Q18E 4Q18E
9/30/18 12/31/18

3,030.3
6.8%

FY18E
12/31/18

792.0
6.7%
2.2%

1Q19E
3/31/19

810.4
5.8%
2.3%

2Q19E
6/30/19

792.2
6.0%
-2.2%

818.8
5.7%
3.3%

3Q19E 4Q19E
9/30/19 12/31/19

3,213.4
6.0%

FY19E
12/31/19

Craig-Hallum Capital Group
Kevin Ellich   (612) 334-8228

FY15
FY16
12/31/15 12/31/16

774.6
6.9%
3.6%

Acadia Healthcare Company, Inc.
Income Statement ($ millions, except per share amounts)
Period
Ending

747.7
4.3%
-2.4%

1,750.3
231.7
128.1
87.2
369.5
167.1
2,733.9
2,753.9
459.5
14.30%

765.7
7.0%
3.2%

442.9
59.8
32.8
22.1
92.9
42.6
693.1
698.1
120.7
14.74%

742.2
9.3%
2.4%

1,653.7
438.8
440.0
428.6
221.3
58.6
55.1
58.2
120.4
31.7
32.0
31.7
79.9
21.8
21.9
21.4
347.9
94.2
92.4
89.9
159.2
41.6
41.3
41.6
2,582.4
686.6
682.8
671.4
2,600.0
691.6
687.8
676.4
430.3
100.3
122.6
115.8
14.20% 12.67% 15.13% 14.62%

2,836.3
0.9%

416.7
405.3
53.5
55.7
30.1
29.9
20.2
19.4
87.3
84.5
39.9
39.6
647.8
634.4
650.7
639.4
115.1
108.3
15.03% 14.48%

192.0
267.5
8.32%
42.8
16.00%
46.0
224.7
0.0
224.7
0.0
224.7
241.5
7.51%

724.5
3.1%
1.1%
411.5
54.0
29.4
20.3
88.2
39.8
643.2
648.9
93.3
12.57%

186.1
48.0
48.0
48.0
48.0
244.2
52.3
74.6
67.8
72.7
8.06%
6.61%
9.21%
8.56%
8.88%
27.9
8.4
11.9
10.9
11.6
11.42% 16.00% 16.00% 16.00% 16.00%
41.2
9.2
12.7
11.7
12.4
216.3
44.0
62.7
57.0
61.1
0.0
0.0
0.0
0.0
0.0
216.3
44.0
62.7
57.0
61.1
0.1
0.0
0.0
0.0
0.0
216.3
44.0
62.7
57.0
61.1
220.6
48.2
66.9
61.2
65.3
7.28%
6.08%
8.25%
7.72%
7.97%

716.7
-2.4%
0.1%
1,536.2
196.2
114.4
76.8
331.8
143.0
2,398.4
2,423.5
412.8
14.55%

45.8
47.5
47.5
69.3
60.8
66.1
9.04%
8.13%
8.53%
10.4
9.7
10.6
14.97% 16.00% 16.00%
10.9
10.5
11.2
58.9
51.1
55.5
0.0
0.0
0.0
58.9
51.1
55.5
0.1
0.0
0.0
58.8
51.1
55.5
61.2
55.3
58.9
7.99%
7.39%
7.60%

$2.74
88.2

715.9
-5.4%
5.4%
390.6
53.5
29.4
19.3
82.7
37.8
613.2
618.6
105.9
14.61%
45.2
48.1
6.48%
(2.8)
-5.79%
8.5
50.9
0.0
50.9
0.1
50.8
45.2
6.09%

$0.74
88.4

30.0
676.5
21.05%

679.2
10.1%
-3.4%

1,541.9
376.4
383.6
385.6
185.5
43.4
46.3
53.0
117.4
27.7
28.6
28.7
73.3
19.0
19.4
19.0
312.6
83.7
83.1
82.3
135.1
33.6
35.2
36.4
2,365.8
583.8
596.3
605.1
2,596.6
588.0
606.2
610.7
214.3
91.2
109.7
106.0
7.62% 13.43% 15.33% 14.79%
176.0
236.8
8.35%
37.2
15.71%
61.9
199.6
0.0
199.6
(0.2)
199.6
200.0
7.05%

7.5
175.8
21.47%

54.47%
7.21%
3.99%
2.71%
11.50%
5.20%
85.08%
85.70%
1.71%

55.42%
6.39%
4.08%
2.79%
12.33%
4.95%
85.96%
86.57%
1.96%

53.58%
6.47%
4.00%
2.71%
11.61%
4.92%
83.30%
84.67%
1.94%

420.2
58.1
31.0
19.9
87.9
39.9
657.0
661.0
113.6
14.66%

181.3
42.8
43.5
44.5
45.2
33.0
48.5
66.2
61.5
60.6
1.17%
7.14%
9.25%
8.58%
8.37%
28.8
13.7
16.6
16.0
(9.1)
87.33% 28.28% 25.04% 25.98% -14.92%
55.5
12.9
18.8
17.0
13.1
4.2
34.8
49.6
45.5
69.7
0.0
0.0
0.0
0.0
0.0
4.2
34.8
49.6
45.5
69.7
(2.0)
(0.2)
0.0
(0.1)
0.1
6.1
35.0
49.6
45.6
69.6
210.2
39.9
57.2
50.2
52.9
7.48%
5.87%
7.99%
7.01%
7.30%

27.0
7.5
7.5
7.5
634.1
154.4
176.5
169.9
20.93% 19.50% 21.78% 21.45%

54.10%
7.30%
4.00%
2.70%
11.35%
5.20%
84.65%
85.26%
1.69%

5.8%
4.7%
6.4%
9.1%
6.2%
4.9%
6.8%
9.5%
8.7%
6.7%

$0.69
88.2

54.10%
7.35%
4.00%
2.70%
11.35%
5.25%
84.75%
85.38%
1.75%

5.4%
2.9%
5.7%
11.1%
5.7%
6.7%
6.3%
10.8%
10.0%
7.2%

$0.76
88.1

54.30%
6.80%
3.95%
2.70%
11.40%
5.10%
84.25%
84.87%
1.70%

5.8%
4.5%
6.0%
10.0%
6.4%
5.0%
7.0%
10.7%
9.9%
6.6%

$0.55
88.0

55.40%
7.40%
4.00%
2.75%
11.90%
5.25%
86.70%
87.33%
1.71%

5.6%
3.1%
6.2%
8.1%
5.8%
3.5%
6.6%
9.4%
8.6%
6.9%

$2.52
87.5
6.5
164.0
21.17%

54.57%
7.30%
3.97%
2.64%
11.48%
5.25%
85.22%
85.80%
1.64%

6.6%
8.5%
7.9%
7.4%
6.8%
4.5%
7.5%
6.6%
5.7%
6.0%

$0.67
87.8

$0.52
87.3

7.1
6.5
165.0
159.4
21.55% 21.32%

54.25%
7.50%
4.00%
2.57%
11.35%
5.15%
84.82%
85.34%
1.55%

7.7%
12.8%
5.2%
4.0%
4.8%
11.3%
4.2%
10.3%
9.7%
4.9%

$0.63
87.6

$2.30
87.0

54.20%
7.45%
4.00%
2.60%
11.30%
5.30%
84.85%
85.52%
1.60%

7.6%
8.7%
5.2%
3.0%
6.3%
5.7%
7.3%
11.3%
10.5%
6.8%

$0.70
87.5

$0.61
87.2

6.9
145.7
19.63%

54.42%
6.98%
3.94%
2.64%
11.40%
5.21%
84.60%
84.97%
1.71%

5.1%
5.0%
4.4%
2.1%
2.6%
8.7%
2.2%
10.0%
9.5%
4.7%

$0.58
87.2

23.5
604.4
21.31%

55.44%
7.28%
3.96%
2.73%
11.89%
5.36%
86.66%
87.43%
1.68%

8.6%
15.4%
5.2%
4.1%
5.0%
13.4%
4.9%
6.9%
6.2%
1.7%

$0.66
86.9

4.5
153.5
21.19%

54.16%
6.92%
4.03%
2.71%
11.70%
5.04%
84.56%
85.45%
1.53%

9.3%
24.4%
6.0%
6.9%
5.4%
18.3%
2.3%
13.3%
12.8%
6.9%

$0.46
86.9

28.3
7.4
7.4
4.2
608.6
136.4
162.2
152.3
21.65% 20.08% 22.66% 21.24%

53.91%
7.38%
4.06%
2.67%
11.41%
5.21%
84.64%
85.39%
1.14%

-0.4%
5.8%
-2.5%
4.7%
6.2%
5.9%
92.6%
(4.9%)
(6.0%)
(0.7%)

$2.45
86.0

53.80%
7.40%
4.00%
2.66%
11.49%
5.08%
84.42%
85.21%
1.08%

1.6%
12.5%
1.6%
5.4%
1.3%
11.2%
19.7%
3.0%
2.7%
2.7%

58.3%
10.4%
-6.0%
59.3%
8.5%
-7.9%
45.6%
3.8%
-8.2%
125.5%
28.1%
-5.0%
51.2%
19.2%
2.7%
112.6%
20.2%
-4.2%
(21.1%)
30.0% (10.5%)
37.6% (13.0%) (9.4%)
9.5% (16.5%) (9.4%)
50.3%
4.1% (5.8%)

Page 4 of 5

October 16, 2018

-5.6%
11.2%
-6.2%
-3.5%
3.2%
0.1%
NM
0.6%
0.0%
(2.3%)

2,810.9
56.6%

20.5
404.8
22.56%

$2.23
68.4

Total Net Revenue
1,794.5
Change, yr/yr
78.6%
Change, qtr/qtr
Operating expenses:
Salaries, wages and benefits
973.7
Professional fees
116.5
Supplies
80.7
Rents and leases
32.5
Other operating expenses
206.7
Depreciation and amortization
63.6
Non-GAAP Operating Expenses
1,473.7
GAAP Operating Expenses
1,523.0
GAAP Operating Income
271.5
GAAP Operating Margin
15.13%
Interest and other income:
Interest expense, net
106.7
GAAP Pre-tax Income
164.8
GAAP Pre-tax Margin
9.18%
GAAP provision for income taxes
46.4
GAAP tax rate
28.16%
Non-GAAP provision for income taxes
62.4
GAAP Income (Loss) from Continuing Operations 118.4
Income (loss) from discontinued operations, net of tax 0.1
GAAP Net Income
118.2
Net income (loss) attributable to noncontrolling interests (1.1)
GAAP Net Income Attributable to Acadia
119.5
Adjusted Income from Continuing Operations
152.8
Adjusted Net Margin
8.51%
Adjusted EPS
Weighted average shares outstanding, diluted
Stock-based compensation
Adjusted EBITDA
Adjusted EBITDA Margin

69.2%
121.9%
66.6%
166.6%
86.8%
94.5%
55.7%
79.7%
45.3%
87.9%

Margin Analysis:
Salaries, wages and benefits
54.26% 54.85%
Professional fees
6.49%
6.60%
Supplies
4.50%
4.18%
Rents and leases
1.81%
2.61%
Other operating expenses
11.52% 11.12%
Depreciation and amortization
3.54%
4.81%
Non-GAAP Operating Expenses
82.12% 84.16%
GAAP Operating Expenses
84.87% 92.38%
Stock-based compensation as a % of salaries, wages, 2.10%
and benefits
1.84%
Y/Y % Change:
Salaries, wages and benefits
Professional fees
Supplies
Rents and leases
Other operating expenses
Depreciation and amortization
GAAP Operating Income
Adjusted Income from Continuing Operations
Adjusted EPS
Adjusted EBITDA

Source: Company data and Craig-Hallum Capital Group, LLC, estimates

Acadia Healthcare Company, Inc.
Institutional Research

 October 17, 2018

REQUIRED DISCLOSURES
$80

10/16/2018

ACHC

$35.48

$70

$60
$50

$40
$30
$20
$10

10/15/2018

08/21/2018

06/27/2018

05/03/2018

03/09/2018

01/12/2018

11/16/2017

09/25/2017

08/01/2017

06/07/2017

04/12/2017

02/16/2017

12/21/2016

10/27/2016

09/02/2016

07/12/2016

05/17/2016

03/23/2016

01/28/2016

12/02/2015

$0

Initiate: June 26, 2012 – Rating: Buy – Price Target: $21
…
April 29, 2015 – Rating: Buy – Price Target: $77
August 6, 2015 – Rating: Buy – Price Target: $100
February 18, 2016 – Rating: Buy – Price Target: $85
October 19, 2016 - Rating: Buy - Price Target: $60
November 3, 2016 – Rating: Buy – Price Target $52
July 28, 2017 – Rating: Buy – Price Target $65
October 25, 2017 – Rating: Buy – Price Target $41
Analyst Change:
February 22, 2018 – Rating: Buy – Price Target: $45
July 31, 2018 – Rating: Buy – Price Target: $44
October 17, 2018 – Rating: Hold – Price Target: $34

Source: FactSet
Ratings definitions:
Buy rated stocks generally have twelve month price targets that are more than 20% above the current price. Hold rated
stocks generally have twelve month price targets near the current price. Sell rated stocks generally have no price target
and we would sell the stock.
Fundamental trend definitions:
Improving means growth rates of key business metrics are generally accelerating. Stable means growth rates of key
business metrics are generally steady. Mixed means growth rates of some key business metrics are positive but others are
negative. Declining means growth rates of key business metrics are generally decelerating.
Ratings Distribution (9/30/2018)

Rating
Buy
Hold
Sell
Total

% Of Companies
Covered
77%
21%
1%
100%

% With Investment
Banking Relationships
18%
2%
0%
14%

Information about valuation methods and risks can be found in the “STOCK OPPORTUNITY”
and “RISKS” sections, respectively, of this report.
CHLM makes a market in this security.
CHLM expects to receive or intends to seek compensation for investment banking services from the subject company in the
next three months.
Analysts receive no direct compensation in connection with the firm’s investment banking business. Analysts may be eligible
for bonus compensation based on the overall profitability of the firm, which takes into account revenues from all of the firm’s
business, including investment banking.

OTHER DISCLOSURES
Although the statements of fact in this report have been obtained from and are based upon recognized statistical services,
issuer reports or communications, or other sources that Craig-Hallum believes to be reliable, we cannot guarantee their
accuracy. All opinions and estimates included in this report constitute Craig-Hallum's judgment as of the date of this report
and are subject to change without notice. Craig-Hallum may effect transactions as principal or agent in the securities
mentioned herein. The securities discussed or recommended in this report may be unsuitable for investors depending on
their specific investment objectives and financial position. This report is offered for informational purposes only, and does
not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such would be
prohibited. Additional information available upon request. Member SIPC.

REGULATION AC CERTIFICATION
I, Kevin Ellich, hereby certify that the views expressed in this research report accurately reflect my personal views about the
subject security and issuer. No part of my compensation was, is or will be directly or indirectly related to the specific
recommendations or views contained herein.

Acadia Healthcare Company, Inc.
Institutional Research

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