Acadia Healthcare (ACHC)

Behavioral health company Acadia Healthcare (NASDAQ:ACHC) met Wall Street’s revenue expectations in Q1 CY2025, but sales were flat year on year at $770.5 million. The company’s outlook for the full year was close to analysts’ estimates with revenue guided to $3.35 billion at the midpoint. Its non-GAAP profit of $0.40 per share was 12% above analysts’ consensus estimates.

Company Overview

With a network of over 250 facilities serving patients in 38 states and Puerto Rico, Acadia Healthcare (NASDAQ:ACHC) operates facilities providing mental health and substance use disorder treatment services across the United States.

Hospital chains operate scale-driven businesses that rely on patient volumes, efficient operations, and favorable payer contracts to drive revenue and profitability. These organizations benefit from the essential nature of their services, which ensures consistent demand, particularly as populations age and chronic diseases become more prevalent. However, profitability can be pressured by rising labor costs, regulatory requirements, and the challenges of balancing care quality with cost efficiency. Dependence on government and private insurance reimbursements also introduces financial uncertainty. Looking ahead, hospital chains stand to benefit from tailwinds such as increasing healthcare utilization driven by an aging population that generally has higher incidents of disease. AI can also be a tailwind in areas such as predictive analytics for more personalized treatment and efficiency (intake, staffing, resourcing allocation). However, the sector faces potential headwinds such as labor shortages that could push up wages as well as substantial investments needs for digital infrastructure to support telehealth and electronic health records. Regulatory scrutiny, and reimbursement cuts are also looming topics that could further strain margins.

Acadia Healthcare's primary competitor is Universal Health Services (NYSE:UHS), which operates behavioral health facilities alongside its acute care hospitals. Other competitors include private behavioral health providers and hospital systems with psychiatric units.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $3.16 billion in revenue over the past 12 months, Acadia Healthcare has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Acadia Healthcare grew its sales at a tepid 2% compounded annual growth rate. This fell short of our benchmarks and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Acadia Healthcare’s annualized revenue growth of 8.2% over the last two years is above its five-year trend, suggesting some bright spots.

We can dig further into the company’s revenue dynamics by analyzing its number of admissions, which reached 48,507 in the latest quarter. Over the last two years, Acadia Healthcare’s admissions averaged 2.2% year-on-year growth. Because this number is lower than its revenue growth, we can see the company benefited from price increases.

This quarter, Acadia Healthcare’s $770.5 million of revenue was flat year on year and in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 8.2% over the next 12 months, similar to its two-year rate. This projection is noteworthy and indicates the market is forecasting success for its products and services.

Acadia Healthcare has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 13%, higher than the broader healthcare sector.

Looking at the trend in its profitability, Acadia Healthcare’s operating margin decreased by 5.7 percentage points over the last five years. The company’s two-year trajectory also shows it failed to get its profitability back to the peak as its margin fell by 3.6 percentage points. This performance was poor no matter how you look at it - it shows its expenses were rising and it couldn’t pass those costs onto its customers.

in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Acadia Healthcare’s EPS grew at a decent 6.8% compounded annual growth rate over the last five years, higher than its 2% annualized revenue growth. However, we take this with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

In Q1, Acadia Healthcare reported EPS at $0.40, down from $0.84 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Acadia Healthcare’s full-year EPS of $2.86 to shrink by 4.7%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Acadia Healthcare broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, we can see that Acadia Healthcare’s margin dropped by 30 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business.

Acadia Healthcare burned through $163.2 million of cash in Q1, equivalent to a negative 21.2% margin. The company’s cash burn slowed from $463.7 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Acadia Healthcare historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.7%, somewhat low compared to the best healthcare companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Acadia Healthcare’s ROIC averaged 3.2 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Acadia Healthcare reported $91.24 million of cash and $2.33 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $669.3 million of EBITDA over the last 12 months, we view Acadia Healthcare’s 3.3× net-debt-to-EBITDA ratio as safe. We also see its $59.97 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Acadia Healthcare beat analysts’ EPS and EBITDA expectations this quarter. Zooming out, we think this was a decent quarter. The stock traded up 4.8% to $27.11 immediately after reporting.

Updated: May 16, 2025 at 11:49 PM EDT

Before deciding whether to buy Acadia Healthcare or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Acadia Healthcare isn’t a terrible business, but it doesn’t pass our quality test. For starters, its revenue growth was uninspiring over the last five years. And while its sturdy operating margins show it has disciplined cost controls, the downside is its cash profitability fell over the last five years. On top of that, its declining adjusted operating margin shows the business has become less efficient.

Acadia Healthcare’s P/E ratio based on the next 12 months is 9.6x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $42.86 on the company (compared to the current share price of $26.15).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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