Behavioral Health Care Stocks Down – 2.2% in April.
After a weighting adjustment, the Behavioral Health Composite, comprised of American Addiction Centers (AAC), Universal Health Services (UHS), and Acadia (ACHC), rallied again, up 3.9% in February. This is in spite of significant losses in the broader market, with the S&P losing 3.8%.
February means earnings season and Q4 2017 did not disappoint…
ACHC (↑8.2%) led the way, reporting earnings of $0.61 per share, and beating analysts’ expectations by 13%. The company also saw earnings increase 3.4% year over year. CEO Joey Jacobs commented, “We are pleased with the overall performance for the fourth quarter. Our results met or exceeded our revised expectations. Total same-facility revenue for the fourth quarter of 2017 increased 5.6% as compared to the fourth quarter of 2016.” Wall Street cheered as ACHC’s shares rose 8% the day of the announcement.
AAC (↑9.5%) reported next, with earnings of $0.10 per share vs. a consensus estimate of $0.04, or a 125% surprise. The Street rewarded the company as shares rallied 16% during the two-day period following their announcement. “Revenue, adjusted EBITDA, and operating cash flows all increased double-digit on a year-over-year basis. We continue to keep our costs down, enabling us to deliver operational efficiencies that enhance shareholder value” said Michael Cartwright, CEO of AAC.
UHS (↓5.9%) also had an earnings surprise, albeit more modest, after the market closed on 2/28 (the stock did jump nearly 9% the first two days of March). The company reports $2.00 EPS vs. estimates of $1.84. Management continued to both beat their bullish drum and allude to future (select) M&A in one brief statement “I think in our guidance, we presume that roughly half of our free cash flow will be dedicated to sharing repurchase and the other half to sort of undesignated M&A opportunities.”, said UHS’ Chief Financial Officer, Steve Filton.
For the last twelve months (LTM), the BHC lags the S&P 500, losing 6.9% to the S&P’s gain of 14.8%. Optimistically, that gap has narrowed in recent months.
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.
Stock Prices
Company 4/30/18
AAC $9.46
ACHC $38.10
UHS $114.20
Enterprise Value/EBITDA
Company 2/29/16 2/28/17 2/28/18
AAC 20.77x 13.26x 10.98x
ACHC 18.40x 12.35x 11.27x
UHS 8.73x 9.61x 8.56x
Enterprise Value/Revenue
Company 4/30/16 4/30/17 4/30/18
AAC 2.98x 1.52x 1.51x
ACHC 3.94x 2.55x 2.31x
UHS 1.60x 1.67x 1.42x
M&A News
February 13, 2018 – Summit BHC (Summit), a leading provider of addiction treatment and behavioral health services, announced the acquisition of Cottonwood Tucson. Located in Tucson, Arizona, the 65-bed addiction treatment facility will be its second facility in the state (Summit acquired Women in New Recovery, a Mertz Taggart client, in 2017) and brings the Company’s total number of operating facilities to fourteen. The financial terms of the deal were not disclosed.