ACHC | Trends in Mental Health Staffing Continue to Worsen
Background
Last week, Best Idea Short, Acadia Healthcare (ACHC) reported 4Q21 Earnings and guided both 1Q22 and FY22 metrics. At a glance, the release appeared to be a beat and raise driven by better-than-expected revenue per admissions and strong incremental demand. Upon deeper inspection, the revenue beat, and subsequent pricing leverage resulted from $17.9M in Cares Act money. Similarly, the revenue guide was only greater than consensus due to the acquisition of CentrePointe Behavioral, which is expected to contribute 4% growth YoY in FY22.
Other notable elements from the call included the addition of only 13 organic beds (and 101 clinicians), flat total facility admissions YoY, and negative average facility admissions per total beds and per facility YoY. We suspect that the weakness demonstrated in these metrics is the result of added pressure from staffing shortages throughout the US medical economy and mentioned by UHS a few days prior. Nonetheless in response to the earnings call, the stock has reversed trend and expanded the multiple from ~10.7x EV/NTM EBITDA to the top of its historical range of 13.0x. Optimism about a full recovery in the organic and inorganic bed growth in 2023 and 2024 has been a key reason for the expanded multiple, although we continue to expect staffing will remain a critical choke point for both.
Thesis
Despite the strategic maneuvering executed in this quarter, the trends in all of our internal catalysts continue to worsen. Our forecast algorithm for same facility admissions projects another quarter of flat to negative growth YoY with our top model expecting 0.8% YoY and the average of our top 50 models coming in at -1.2% growth YoY. Similarly, the upward trend we observed in average hourly earnings for employees of psychiatric and substance abuse hospitals paired with the negative trend in aggregate weekly hours continues nearly two years after the onset of the pandemic. We have heard anecdotally that while some healthcare workers feel the time is right to return to work, others are finally feeling the effects of burnout and “morale injury” and taking time away.
While it can be hard to quantify these anecdotes globally, we have developed a Locations Tracker for ACHC which allows us to monitor not only recent hiring, but also aspects of retention and turnover. This tool is even more helpful when you recognize that a key component of ACHC’s strategy includes maintaining a roughly 3-to-1 ratio of clinicians to beds across their system. From previous updates, we can see that ACHC hired 101 clinicians last quarter, with an additional 55 coming onboard in the first two months of 1Q22. In the end, this is the most important number in determining what strategy management will follow and how the quarter will be reported.
We are keeping our active short position in ACHC as we believe that the labor situation will continue to worsen from here leaving ACHC with fewer options, although we need near term trends and results to negatively impact the long term outlook and estimates which so far has not been the case. We're down in the position and won't let it run away but may look for a better spot if we continue to be wrong on the name.
Valuation
Progressing into the earnings call, ACHC had experienced a negative estimate revision across all near-term quarters and the multiple had degraded as well. After the earnings call, those estimates and multiple have responded positively, but we expect comes with a limit to growth. Based on our assumptions, we have modeled 2022 and 2023 EBITDA of $574.0MM versus consensus of $592.6MM and $636.1MM versus consensus of $652.4MM, accordingly. Given its historical EV/NTM EBITDA range, we expect approximately 10% additional upside with downside of 40% based on our estimates.
Catalysts/Risks
- Nursing Opening & Wages Tracker
- BLS Series for Psychiatric & Substance Abuse
- Forecast Algorithm for Same Facility Admissions
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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