Analyst: Don't Buy The Weakness In Acadia Healthcare

Investors looking to buy shares of Acadia Healthcare Company Inc (NASDAQ: ACHC) after a 25-percent decline in reaction to a disappointing earnings report may want to reconsider, according to analysts at Mizuho Securities. The firm's Ann Hynes downgraded Acadia's stock rating from Buy to Neutral with a price target slashed from $60 to $36.

Acadia's earnings report was highlighted by concerning census issues in its UK business, Hynes wrote in the downgrade note. But the issues are structurally related to the national healthcare system, National Health Services, and not company-related. Specifically, referral patterns at the NHS shifted from a centralized approach from corporate NHS toward a decentralized approach to regional councils.

The NHS accounts for approximately one-third of Acadia's total revenues and the change reduces the company's earnings visibility. In fact, the only possible solution would be the company going private so it can "fix the U.K. issues away from public scrutiny." The problem is the balance sheet's debt to EBITDA leverage of roughly 5.4x, which serves as a notable obstacle towards a go-private deal.

But Acadia's woes are also domestic-based as the Centers for Medicare & Medicaid Services (CMS) proposed on Friday a change to a rule that gives states more flexibility to interpret the ACA's 10 essential benefit requirements — one of which includes mental health.

"Given the national focus on mental health and addiction, we would be surprised if these benefits are at risk," Hynes also said. "However, it could provide an overhang on an already fragile stock."

At time of publication, shares of Acadia were down 3.22 percent at $32.18.

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