2 Ways To Invest In This $11 Billion Industry

Most investors know well that healthcare spending is on the rise. But it’s less well publicized that one of the fastest-growing subsets of healthcare is mental health and addiction treatment, often combined under the umbrella moniker “behavioral health.” Spending on mental health and substance abuse treatment more than doubled over the past 12 years and now represents a $250 billion market in the United States; analysts expect the sector to grow in the high-single-digit percentages for the next several years.

One reason is the growing awareness and diagnosis of psychiatric illnesses, along with declining stigma associated with seeking treatment. More than 18% of American adults suffer from diagnosable mental illnesses; about 4% have been diagnosed with a serious mental illness. Depression alone is a $23 billion industry. And four of the 10 leading causes of disability in the United States are mental illnesses.

#-ad_banner-#Government policy has also helped the sector grow: in 2008, the federal Mental Health Parity and Addiction Equity Act required insurance companies to cover mental illness and addiction as medical problems. The Affordable Care Act required mental health coverage as part of the new exchange system as well.

Substance abuse treatment, while a relatively small part of the behavioral health industry, is growing rapidly: spending has grown from $8 billion in 2005 to $11 billion in 2015, and analysts expect the market to reach $14 billion by 2020. This growth is driven, of late, by the epidemic of opiate and heroin addictions; the number of heroin users alone has grown by 15% annualized over the past five years. 

Acadia Healthcare (Nasdaq: ACHC) is the largest behavioral health provider in the United States and the UK, with 258 facilities with almost 10,000 beds in 39 states, Puerto Rico and the UK. These include psychiatric hospitals, residential treatment centers, outpatient clinics and therapeutic school-based programs.

Thanks in part to a series of acquisitions, Acadia has grown dramatically in recent years: its revenue more than quintupled over the past five years. But even factoring out the impact of acquisitions, Acadia has achieved 10% annualized organic revenue growth during that time — a testament to the rising demand for its services. 

In early January, Acadia announced one of its biggest deals yet: the $1.275-billion acquisition of UK-based Priory Group, which will greatly expand Acadia’s presence in Great Britain. The UK market could provide ample growth due to changes in government policy. While the state-run National Health Service currently provides 70% of psychiatric hospital beds in the UK, the private sector (including Acadia) account for the other 30%. As government budgets shrink, the NHS’ market share here has started to decline — allowing market leaders like Acadia to pick up the slack.

At recent prices, Acadia is trading 35% below its 52-week high and at only 19 times analysts’ consensus estimate for 2016 earnings per share. For a company with Acadia’s growth profile that’s an attractive price.

Universal Health Services (NYSE: UHS) is a Fortune 500 company specializing in behavioral health and acute care facilities in the U.S., Puerto Rico, Virgin Islands and the UK. Along with Acadia, it’s the market leader in the United States and operates about 200 facilities.

Universal Health also has grown through strategic acquisitions, which its management team is praised for integrating well into the overall business. A recent large deal was the purchase of addiction-treatment company Foundations Recovery Network last fall for $350 million, adding 322 residential beds in four facilities and eight outpatient centers.

Universal Health has sector-leading occupancy rates, which keeps profit margins high. Its acute-care hospitals benefit from the aging of America and are mostly located in areas where they have little competition. And like Acadia, Universal has focused on growth opportunities in the UK market, acquiring Cygnet Healthcare in 2014 for $335 million. Cygnet brought a chain of facilities across the country with special strengths in treating eating disorders and autism.

Universal has a strong balance sheet, high profit margins and generates strong cash flow. At recent prices, it trades around 14 times analysts’ consensus estimate for 2015 earnings per share.

Risks To Consider: Changes to federal health policy, including the Affordable Care Act and Medicare/Medicaid reimbursement, could impact these stocks. Both also are subject to government policy changes in the UK.

Action To Take: Buy Acadia Healthcare below $55 and Universal Health Services below $106.

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