ACHC Stock Dips 6.5% – Approaching Intrinsic Value?

Medical Specialities company Acadia Healthcare is taking Wall Street by surprise today, falling to $68.25 and marking a -6.5% change compared to the S&P 500, which moved 1.0%. ACHC is -28.59% below its average analyst target price of $95.58, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, Acadia Healthcare has underperfomed the S&P 500 by -16.7%, moving 6.9%.

Acadia Healthcare Company, Inc. provides behavioral healthcare services in the United States and Puerto Rico. The company is categorized within the healthcare sector. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.

Acadia Healthcare does not release its trailing 12 month P/E ratio since its earnings per share of $-0.24 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for ACHC of -284.4. Based on the company's positive earnings guidance of $4.03, the stock has a forward P/E ratio of 16.9. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the health care sector has an average P/E ratio of 30.21, and the average for the S&P 500 is 15.97.

To better understand ACHC’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.

Acadia Healthcare’s PEG is 2.04, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.

When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Acadia Healthcare was $38.21 Million as of its last annual report. Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In ACHC's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $157.88 Million and they've been growing at an average rate of -21.8%.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Acadia healthcare's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2.18, but is still below the average P/B ratio of the Health Care sector, which stood at 4.08 as of the first quarter of 2023.

Acadia Healthcare is likely overvalued at today's prices because it has a negative P/E ratio., a lower P/B ratio than its sector average, and positive cash flows with a downwards trend. The stock has poor growth indicators because of its with a negative growth trend, and no PEG ratio. We hope this preliminary analysis will encourage you to do your own research into ACHC's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.