Profit warning- pre-release coming below consensus
On October 18th, Acadia (NASDAQ:ACHC) management released disappointing preliminary results for 3Q16. EPS is projected to be -$1.36, much below street consensus of -$0.55, although the pre-released number is impacted by $1.94/share of divestiture loss related to Acadia's UK asset sale.
In addition, management hinted at a guidance change during its full 3Q earnings release on November 1st, 2016.
With ACHC's earnings report and earnings call around the corner, I discuss below why the stock will probably trade sideways until the earnings call.
Priory Acquisition - don't expect much commentary
Although this is the elephant in the room, I don't expect much commentary out of management beyond what's already said in the press release. As is the case with other anti-trust inquiries, lawyers would tell you "less is more" (this is not legal advice!). Management would not (and should not) comment more and provide the CMA with more to poke holes at.
Although the deal was announced ten months ago, now the deal close looks to be a 2Q17 event.
The street will sure look for any bits of information to adjust its merger-arb probability. My best guess is the deal will play out much like the Zimmer-Biomet merger. That merger was stuck with the European Commission for anti-trust review for almost a year. The ZMH- BMET merger arguably dominates a bigger market share than a combined ACHC-Priory entity. As a reminder, the vast majority (70%) of UK mental health market is served by the government entity NHS. As a result, the ACHC-Priory linkup probably won't move the market share or the HHI figure dramatically.
At the end of the day, the Priory deal would be delayed but not killed, in my view. As a result, the $0.40 annual accretion would be delayed but would not disappear.
Pipeline of small-to-medium sized deals and US business will be the focus
Given management's expected silence on Priory during the call, investors' focus will center around Acadia's other deal pipeline and its US business.
Acadia added on average of over 1,000 beds per year during 2011 and 2014. In 2015 it cranked up the pace and added nearly 4,000 beds mainly driven by the CRC acquisition. The management team is a proven squad of deal integrators. Thus, without Priory in the fold yet, more clarity on small deal pipeline would give investors more comfort in the stock.
Acadia's US base business slowed down in 3Q. Same facility revenue growth is "only" 6.5%, vs. 9.5% in 1H16. With no drastic reimbursement change during 3Q16 vs. 3Q15, my best guess of the deceleration is same facility patient days slowed down in 3Q. Yet this is a puzzling conclusion, as the underlying demand for mental health is growing.
Management owes investors a major clarification on this point.
New guidance - how bad can it be
Last but not the least, the headline guidance number will sure be a focus. How much will management pull guidance down? What's driving the revised numbers? Stay tuned…
New price target
Given the uncertainty and pending guidance change, I venture to come up with my new price target. Factoring in the delay of Priory's accretion, my 2017 EPS projection is $1.9. Using a base-case forward P/E multiple of 19x, ACHC should trade around $36/share, just a bit below the current level.
So the stock is kind of a "meh" for investors now- it'd be imprudent to sell now before the growth story plays out; yet it's only somewhat cheap for new buyers.
Disclosure: I am/we are long ACHC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.