ACHC | “New Normal” Changes the Landscape for Mental Health
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ACHC | Best Idea Short | “New Normal” Changes the Landscape for Mental Health Thursday, December 16, 2021 @12:30pm ET Healthcare Subscribers: CLICK HERE for event details (includes video, dial-in and materials link) |
Background
Among the number of adverse effects which have occurred in the wake of the initial lockdown or protruded in the “new normal,” the prevalence and demand for mental health conditions have emerged at a rapid pace following new stresses. According to this past year’s survey from the US Census Bureau, more than 42% of Americans reported symptoms of anxiety or depression, a cataclysmic increase from 11% the previous year. As a result, a number of hybrid and completely virtual mental health offerings have emerged to meet incremental demand. In our coverage, we have discussed Teladoc’s BetterHelp + myStrength offering and earlier today, moved Lifestance, the largest provider of hybrid mental health care management, to our Active Long list. Following additional thesis work and tracker development, we are moving Acadia Healthcare (ACHC), a pure play behavioral health management provider, to our Active Short list.
Since the stock reached its all-time high in April, ACHC has seen a significant re-rating in both its EV/Sales and EV/ EBITDA multiples, now trading at 2.88x NTM Sales and 12.35x NTM EBITDA. From here, we believe the price will be more highly correlated to EBITDA based on management’s ability to succeed in an environment primed for top-line growth but shrouded in supply headwinds.
Thesis
Demand for mental health services is strong, which would normally rhyme with being long, but in this post pandemic environment, is a driver of the short case. As demand for mental health services has risen and driven ever greater demands on front line workers, the supply of labor is shrinking, burnt out by the pandemic and its fallout. But the pandemic has offered a choice and made it exceedingly attractive. Demand has risen for "new models' of mental health platforms that offer a mix and match of hybrid and remote, good benefits, and higher pay. ACHC relies more heavily on the ability for a legacy provider to successfully adapt to the new needs of patients and providers over a short time horizon burdened by their existing infrastructure. For this reason, our thesis is centered on the ability to ramp staffing and beds to meet incremental (higher acuity) demand, stave off new entrants, and maintain cost controls.
The way we see it, ACHC has a choice to either expand capacity through capex and acquisitions and pay up to staff the beds, or slow expansion, slow capacity utilization, and hunker down with the staff they have. The data on wage inflation for workers, ACHC will have to make a decision to either continue delaying the projects they have in the pipeline in favor of maintaining better pricing metrics but sacrificing on top-line growth in the near term. Or de-prioritize their typical hiring metrics in order to attract the necessary nurses, medical technicians, and licensed clinical social workers from newly formed, hybrid employers.
We believe the $85MM reduction (at the midpoint) in FY capex guidance given on the 3Q21 Earnings Call in October is likely the first indication of the dilemma ACHC is facing. Despite re-assuring investors that wage inflation was under control due to the company’s lower-than-average percentage of agency labor (ACHC 2% versus industry standard of 5%-10%) and recognition of a proactive approach to paying premium wages (cited stable +3% versus BLS +10% YoY in category), we are not convinced the previous methods used to manage through previous labor disruptions will succeed in the current market, which is believed to be “reaching its climax” of fatigue with recovery most likely to occur in 2023-2024.
Valuation
Although Acadia Healthcare has already experienced a multiple degradation in 2H21, we do not believe the true opportunity to short this name has occurred yet. Consensus estimates show that the market believes the revenue opportunity will shrink while improving upon the EBITDA line. Based on the potential labor headwinds, we have modeled 2021 revenue in-line with consensus of $2.309B and a miss in 2022 revenue versus consensus of $2.481B. Utilizing the midpoint of its pre-COVID historical trading range, we expect 20%-35% downside from the current price with potential for further downside in the out years following poor performance in the near-term.
Catalysts
- Publicly Available Datasets (BLS, BEA, ADP) | From the most recent JOLTS Data, we can see that net of quits, job openings within healthcare increased by an additional 41k positions in October. Despite a high number of opportunities and benefit packages, providers remain on the sidelines after feeling the effects of burnout, fatigue, and “moral injury.”
- 4Q21 Earnings Call | Following the company’s narrowed guide for FY21, reduction in FY CapEx guidance, and the small margin of beds needed to meet the company’s target (282 in 3Q21 with FY goal of 300), we feel confident that the company has in place the necessary infrastructure to meet current expectations. Where we believe the negative catalyst could come in the form of a weak FY22 guide.
- Company-Specific Locations Workbook | Utilizing a proprietary method which we have developed across our work in advanced primary care, we have developed a tool to map and measure ACHC’s sites of care by their classification, as well as the number of and type of providers currently working in the facility.
Risks
- Demand Has Expanded, Workers Are Unaffected | Should management be able to keep workers satisfied through alternative options which do not heavily impact their SWB Margin, and are unaffected by new hybrid employers, they should have the necessary staff to meet demand and capitalize on the opportunity.
- Positive Revision of Reimbursement Rates | In light of COVID disruptions, state and local governments have placed a higher point of emphasis on behavioral health than ever before. Should this interest manifest into real, policy changes that place a higher reimbursement rate on these services, ACHC would benefit per bed.
Key Slides
Our model is up-to-date and available for interested Health Care Subscribers, as well as all data available upon request. Please reach out to with any inquiries.
Thomas Tobin
Managing Director
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