Behavioral Healthcare Stocks Up 4.3% in July
The Behavioral Health Composite, which tracks investor interest in the three public behavioral healthcare companies – Acadia Healthcare (ACHC), American Addiction Centers (AAC), and Universal Health Services (UHS) – was up 4.3% for the month of July. The S&P 500, by comparison, was up 3.3%. “It was another volatile month for the behavioral stocks, as these companies continue to grow in the face of ever-changing payor dynamics and the complexities of an expanding international presence”, said Cory Mertz, Managing Partner with Mertz Taggart.
July was earnings month…
Acadia Healthcare – ACHC (↓4.4%) was down on news of lowered 2018 revenue projections. In its Q2’18 earnings release after the market closed on July 30th, the company lowered its previous 2018 revenue guidance from approximately $3.06Bn to $3.04Bn. Acadia also lowered its earnings per diluted share projections from a range of $2.60 to $2.54. In its earnings call Acadia Chairman and CEO Joey Jacobs blamed higher interest rates and a lower exchange rate between British pounds and the dollar for the lower guidance. They continue to add beds, mostly to existing facilities, adding 276 new beds through Q2, with plans to add a total of 800 new beds in 2018. When asked what they plan to do with their growing cash stockpile, Jacobs commented, “The pipeline is very active, and we would just continue to hold the cash. I expect that by the time we talk to you again at the end of October, that we would have spent some of this cash on an acquisition.”
American Addiction Centers – AAC (↑7.3%) stock began a run-up from July 25th to July 30th. We suspect this was due to expectations of a strong earnings release for Q2’18. However, AAC missed its Q2 EPS by 50%, coming in at $0.09 per share versus consensus estimates of $0.18 per share. We will provide more detail on the earnings in the August newsletter.
Universal Health Services – UHS (↑10.0%) was up on strong earnings. On July 25th, UHS announced that its net income was $226.1MM, or $2.39 per diluted share, during the Q2’18 as compared to $185.4MM, or $1.91 per diluted share, during the comparable quarter of 2017. Net revenues increased 2.6% to $2.68Bn during Q2’18 as compared to $2.61Bn during Q2’17. In addition, on July 31st, UHS announced the acquisition of The Danshell Group (“Danshell”) through its UK subsidiary Cygnet Health Care. Danshell owns and operates 25 facilities with a total of 288 beds in the UK. The Danshell facilities support and care for adults living with learning disabilities, who may also have a diagnosis of autism, in specialist supported living, residential services, and hospitals. Through this acquisition, the company expands into new service lines and new geographical areas, complementary to the existing UK portfolio.
For the last twelve months (LTM), the BHC was behind the S&P 500 at a 0.2% gain relative to the S&P’s gain of 14.0%.
Valuation – Public Comps
Below are the Enterprise Value / EBITDA and Enterprise Value / Revenue ratios for AAC, ACHC and UHS. The valuations provide a relative barometer for what smaller companies can expect. Given the higher relative risk of smaller companies (e.g., less liquidity, smaller revenue base), we typically (though not always) see multiples that are lower than those of the public companies.
Company 7/31/16 7/31/17 7/31/18
AAC 21.65x 12.10x 12.61x
ACHC 17.20x 13.69x 11.21x
UHS 9.55x 8.67x 9.12x
Company 7/31/16 7/31/17 7/31/18
AAC 3.09x 1.25x 1.89x
ACHC 3.65x 2.78x 2.26x
UHS 1.72x 1.47x 1.47x
July 9, 2018 – Pennsylvania-based Pyramid Healthcare announced today it has entered into an agreement to purchase WaldenSierra, a system of substance abuse and behavioral health treatment programs serving southern Maryland since 1973. Pyramid Healthcare currently operates around 80 behavioral health facilities and six autism schools in Pennsylvania, New Jersey, and North Carolina. This will be Pyramid’s first expansion into Maryland.
July 10, 2018 – Northstar Academy, a series of leading adolescent treatment centers specializing in mental health, trauma, eating disorders, and substance abuse, acquired all the assets of NorthStar Academy Adolescent Treatment Center, which will formally become a part of Newport Academy’s growing network across the country—including locations in California, Connecticut, and Pennsylvania.
July 11, 2018 – Rosecrance, a Midwest behavioral health organization, announced that it has agreed to a merger with Iowa-based Jackson Recovery Centers that are expected to be finalized in mid-2019. Combined revenue would be over $100MM. The planned merger with Jackson Recovery Centers would result in an organization with nearly 60 locations across the Midwest.
July 11, 2018 – Taft, Tennessee-based Magnolia Ranch Recovery, which offers inpatient rehabilitation, announced the merger with Murfreesboro, Tennessee-based Tulip Hill Recovery, which provides intensive outpatient and aftercare services with case management.
July 18, 2018 – Delphi Behavioral Health Group, a nationwide provider of addiction and detox treatment programs, announced today the acquisition of Family Recovery Specialists (FRS), located in Miami, Florida. Family Recovery Specialists is an outpatient program that provides comprehensive evaluations and treatment for adults and adolescents suffering from substance use and mental health disorders.
July 18, 2018 – Refresh Mental Health acquires Memphis, Tennessee-based Fairhaven Treatment Center. Fairhaven offers a full continuum of care for adult and adolescent women with eating disorders. Refresh’s portfolio includes practices across the U.S., which provide services that include: individual, couples, and group therapy; substance abuse and addiction services; psychiatry and medication management; eating disorder treatment; and outpatient, intensive outpatient, in-home, and residential care.
July 31, 2018 – Century Park Capital Partners acquires Dominion Youth Services (“DYS”). Headquartered in Richmond, Virginia, DYS is a leading provider of behavioral health services to children and young adults across Virginia. RGA Private Debt & Equity provided the debt financing for the transaction.
July 31, 2018 (mentioned earlier) – UHS announced the acquisition of The Danshell Group (“Danshell”) through its UK subsidiary Cygnet Health Care. Danshell owns and operates 25 facilities with a total of 288 beds in the UK. The Danshell facilities support and care for adults living with learning disabilities, who may also have a diagnosis of autism, in specialist supported living, residential services, and hospitals. Through this acquisition, the company expands into new service lines and new geographical areas, complementary to the existing UK portfolio.