Over the past six months, Acadia Healthcare’s shares (currently trading at $24.57) have posted a disappointing 15.9% loss, well below the S&P 500’s 18.4% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Acadia Healthcare, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Acadia Healthcare Not Exciting?
Even with the cheaper entry price, we're swiping left on Acadia Healthcare for now. Here are three reasons we avoid ACHC and a stock we'd rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Hospital Chains company because there’s a ceiling to what customers will pay.
Acadia Healthcare’s admissions came in at 51,922 in the latest quarter, and over the last two years, averaged 2% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Acadia Healthcare’s margin dropped by 24.8 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because it’s already burning cash. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. Acadia Healthcare’s free cash flow margin for the trailing 12 months was negative 9.6%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Acadia Healthcare’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Acadia Healthcare’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 8.9× forward P/E (or $24.57 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
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