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ACHC | Triple Digit Hiring in May Prompts Us to Shoot to Score
Following our latest Locations Tracker Update, we moved ACHC up to an Active Long. On Wednesday, at 12:30pm ET, we'll go through the data in the studio prior to the company publishing their 2Q22 Earnings Release after the market closes. Below, you will find the event details for the call, as well as our latest Stock Brief in which we promoted ACHC from a long bench idea to the active long list last quarter. Between the release of this invite and the call on Wednesday, we will also be speaking with an expert on the CTC business and UHS will host their 2Q22 Earnings Call, providing read throughs and additional color on their pre- announcement from last month. We'll include commentary on these updates and will hold a Q+A Session after the presentation for subscribers. Feel free to send any thoughts, questions, or commentary ahead of time to .
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Black Book | ACHC | Best Idea Long | Triple Digit Hiring in May Prompts Us to Shoot to Score Wednesday, July 27, 2022 @ 12:30 PM ET - Add to Outlook Calendar Healthcare Subscribers: CLICK HERE for event details (includes video and materials link) |
Background
When we flipped Acadia Healthcare (ACHC) from the short bench to the long bench last month, we titled the note, “Setting Up for Our Shot” in order to explain the initiation of a potential active long position based on our next Locations Tracker update. Following that update last week, we are confident that the positive demand trends we highlighted for mental health care broadly at the end of 2021 have been and will continue to be recognized by ACHC facilities. Incremental volumes will occur in both the inpatient and outpatient (CTC) facilities, and we believe will be defensive throughout multiple Hedgeye Macro Quad 4’s. These volume tailwinds in combination with both quantitative and anecdotal signs of easing wage inflation should pull forward the opportunity for outperformance that we had been setting up for.
Since last publishing, the ACHC held up better than most stocks with minimal multiple degradation from 13.0x EV/NTM EBITDA to 12.5x today, impressive given the downward pressure caused by last Friday’s CPI print and Wednesday’s Fed hike. Similarly, consensus EBITDA estimates revised positively for the next three years, continuing the positive trend that began in May. We can see from the MicroQuad tool that this trend is forecasted to accelerate throughout the rest of June and into October while remaining in MicroQuad 2 through the rest of FY22.
From a Quad-Factor Screen perspective, Acadia has moved from essentially neutral to slightly positive in the past month due to the improvement in its estimate momentum. Current positive Macro Quad 4 factors include size, liquidity, estimate momentum, and margin factors offset by short interest, which has fallen month- over- month but remains elevated. With all this being said, we do expect a slight improvement in timing as we get closer to the 2Q22 earnings release and 2H22 guide projected to occur in August. This expectation is heavier tied to broader market pressure during a quieter time for the ACHC catalyst path than to fundamental weakness in the business strategy or demand trends.
Thesis
We originally became involved with ACHC as a short based on the preliminary thesis that despite overwhelming demand for mental health care as a result of the pandemic, legacy providers would struggle to attract not only patients, but also providers. The traditional treatment setting for mental health and substance abuse appeared both more challenging and dangerous than alternative sites of care within the US Medical Economy. The April update of our Locations Tracker cracked that negative view as the company proved they could maintain stable hiring on a percentage basis, improved attrition by 44 bps, and increased hiring month- over- month from January through March. Additionally, further research showed that management had closed a poorly- reviewed CTC and replaced it with another during the quarter. As a result, we moved ACHC to the short bench.
Following the May 2022 Update, it is clear that management can not only maintain, but succeed in the current environment, providing a positive catalyst for the multi- year growth plan they laid out at JPM. The update included highlights for both new openings and new hires. Beginning with new openings, ACHC opened 3 new acute inpatient hospitals during the quarter in Illinois and Missouri and is set to open another following renovations in FY23. On the outpatient side, there was only 1 new CTC in Indiana during the quarter, but we gained insights into 2 additional locations that will open in Florida in July. While the new openings and further development of the pipeline were positive for future execution of the plan, the hiring in May and significantly low attrition in both May and June were more crucial to our decision to make ACHC an active long.
From the latest ACHC Tracker update, Acadia added 170 net new providers in the past two months with 129 coming on in May and 75 being counselors who directly drive bed expansion and overall patient admissions capacity. Based on past bed-to-provider ratios, this would translate to over 500 new beds throughout the system, but likely indicates further bed expansions to existing facilities. These have lagged in the past two quarters with 13 and 26 additions, respectively. By adding staff at this magnitude, we believe management is capitalizing on easing trends for wage inflation and beginning the organic growth ramp of their plan. Acadia has also maintained a roughly 20 bps level of attrition between April and June, an initiative they have discussed during recent appearances.
Valuation
Based on the updated Locations Tracker, we're forecasting an additional $44MM in top- line revenue in FY22 and $95MM in FY23. These model revisions represent total revenue of $2.622B versus consensus of $2.588B in FY22, and total revenue of $2.861B versus consensus of $2.806B in FY23. The positive impact to EBITDA was $5MM in FY22 and $12MM in FY23, pushing our FY22 estimate above the high end of consensus in FY22 and slightly above the midpoint of consensus in FY23.
Having adjusted our model for the most recent Locations Tracker update, we feel confident adding ACHC as an active long while maintaining that ongoing systematic risk during Macro Quad 4 may present a more favorable entry point closer to the 2Q22 earnings print. Based on our revised estimates and utilizing ACHC’s historical EV/NTM EBITDA range of 10.0x to 15.0x, we expect upside of 20% - 30% in the medium term. Near- term downside at the lower end of the aforementioned range would be (5%) – (15%) from the current price.
Catalysts
- 2Q22 Earnings Release, Call, and Guidance | The next earnings event is a significant catalyst in our positioning change. While we are making ACHC an active long today, we do expect a slight improvement in timing as we get closer to the 2Q22 earnings release and 2H22 guide projected to occur in August. This expectation is heavier tied to broader market pressure during a quieter time for the ACHC catalyst path than to fundamental weakness in the business.
- Hedgeye Locations Tracker and Provider Count | The ACHC Locations Tracker has been incredibly accurate in measuring the pace of bed expansions for both the individual service lines and the business as a whole, because the company maintains a roughly 3x ratio of beds to NPI- holding staff. The latest tracker result for 2Q22 in June was a key determinant in our decision to add ACHC as an active long. We will continue to monitor the data for new hires and attrition.
- CPS Data on Nurse Supply & Employment Status | Labor inflation looks to be easing from the data we follow for registered nurses from the Current Population Survey (CPS). We will continue to monitor the situation, but the more that scarcity alleviates, the easier it will be for ACHC to find suitable candidates to staff their facilities and continue the expansion plans they've guided to.
- Forecast Algorithms for Volume & Pricing | We have used our forecast algorithm tool in the past to predict the US Facility Admissions in the near- term with directional clarity. After recent modifications of our model to account for the growing prevalence of the CTC business, we now believe we will be able to expand the tool's use to gain insights in pricing for both the CTC and remaining business lines.
Risks
- Additional COVID Waves Delay Return to Normal Admissions | ACHC has pointed out disruptions in admissions due to the presence of COVID variants throughout the pandemic offset by longer than historical lengths of stay. While BA.2 did not have nearly the level of hospitalizations or "media frenzy" as those in the past, the emergence of subsequent variants could delay the arrival of patients. We believe this to be a minor risk, but one we monitor daily.
- Providers Choose More Favorable Work Settings After COVID | As mentioned previously, our view that providers did not prefer to work at traditional mental health facilities due to the incremental challenges and danger that came with the job were cracked by the April update of our Locations Tracker. We believe this to be a minor risk as management has demonstrated their ability to attract and retain talent.
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Past Hedgeye Health Care Notes Regarding ACHC Positioning Changes (Referenced in Text) CLICK HERE for Stock Brief | ACHC | Moving to the Long Bench | Setting Up for Our Shot (May 12, 2022) CLICK HERE for ACHC | Moving to the Short Bench | Hiring in 1Q22 Appears Strong (April 11, 2022) CLICK HERE for Stock Brief | ACHC | Best Idea Short | Forego Top- Line Opportunity or Break From Historical Margins (January 24, 2022) |
Key Slides
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