Shares of Acadia Healthcare Company, Inc. ACHC have dropped 24.3% over the past month to close at $39.10 on Wednesday. The steep decline has pushed the stock’s price closer to the lower end of its 52-week range of $36.50-$87.77. It underperformed its peers like Tenet Healthcare Corporation THC and Universal Health Services, Inc. UHS, the overall industry, and the S&P 500 Index.

The company’s current share price might seem like an excellent opportunity to build a position in a renowned behavioral healthcare servicescompany. After all, wouldn’t you prefer to buy near the lows rather than the highs?

One-Month Price Performance

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ACHC is trading below its 50 and 200-day moving averages, indicating a bearish outlook. Buying closer to the low can be attractive, but context matters - let’s explore further.

ACHC’s Recent Hiccups & Valuation

Negative headlines about patient care have weighed on the stock’s performance, sparking concerns over billing practices and length of stay. This sentiment could hinder short-term volume growth, potentially impacting profitability.

The company is currently trading at 10.63X forward 12-month earnings, below its five-year median of 20.55X and the industry average of 13.18X. This suggests the stock is undervalued, potentially reflecting cautious investor sentiment or market concerns about its near-term performance.

ACHC’s Earnings Estimates Moving Down

Reflecting the negative sentiment around Acadia Healthcare, the Zacks Consensus Estimate for earnings per share has seen downward revisions. The consensus estimate for 2024 adjusted earnings for ACHC is currently pegged at $3.42 per share, indicating a 0.6% year-over-year decline.

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More Headwinds

The company has lowered its 2024 financial outlook. Revenue projections were reduced to $3.15–$3.165 billion from the earlier range of $3.18–$3.225 billion. Adjusted EBITDA guidance was also cut to $725–$735 million, down from $735–$765 million.

Acadia Healthcare’s return on invested capital of 8.55X is lower than the industry average of 12.89X, suggesting that the company is less efficient at generating returns from its investments relative to its peers. Apart from competitive disadvantages, the stock is also facing increasing expenses.

Total expenses increased by 7% year over year in 2021, 9.7% in 2022 and 32.1% in 2023, primarily due to higher salaries, wages and benefits. We expect salaries, wages and benefits to jump 7% year over year in 2024 to more than $1.68 billion. Our estimates for professional fees and supplies suggest 9.2% and 5.6% year-over-year growth in 2024, respectively. With growing utilization, the company’s related costs will increase in the days ahead.

ACHC's free cash flow declined 69.3% year over year in 2021, 31.3% in 2022, and 26.1% in 2023. Over the trailing 12 months, its free cash flow has turned negative. This downward trend, despite rising demand for its services, raises concerns about the company’s operations.

Final Words: Steer Clear of ACHC Stock Now

Acadia Healthcare is facing significant challenges, including lower returns, rising costs and declining free cash flow. The stock is trading below key moving averages, signaling a bearish trend. With analysts downgrading earnings estimates, investors should approach ACHC stock with caution as it shows serious downside potential. It currently carries a Zacks Rank #5 (Strong Sell). 

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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