Kenneth Turek has managed the Neuberger Berman Mid-Cap Growth Fund since 2002, handily beating the Russell Midcap index for the past 10 years. He likes companies whose executives “underpromise and overdeliver,” and he thinks that applies to Acadia Healthcare (ACHC). Acadia provides “behavioral health services”—inpatient and outpatient psychiatric care for people with mental-health and addiction problems. After a string of acquisitions, Acadia is now the biggest publicly traded pure-play company in this arena, one of health care’s fastest-growing segments. Turek recently told Fortune why he’s adding to his position.
New health care laws
In 2008, Congress passed the Mental Health Parity and Addiction Equity Act, requiring health plans and insurers to pay for treatment of mental illness and addiction as they would a broken leg or any other physical condition. Thanks in part to the law, spending on mental health and substance abuse doubled between 2003 and 2014, to roughly $240 billion. Congress is now considering a measure to increase reimbursements for similar services to Medicaid patients; if passed, Turek says, that could further boost Acadia’s earnings.
Acadia operates 232 facilities in the U.S., the U.K., and Puerto Rico, with a total of more than 9,400 beds. It has only one large direct competitor, Universal Health Services. When patients undergo mental-health crises, psychiatrists often recommend that they go to facilities like Acadia’s rather than to a general hospital’s emergency room. To pursue such referrals, Acadia deploys a network of relationship managers who meet with doctors regularly to “make the medical community aware of their capabilities,” Turek says.
Growth priced right
Analysts expect Acadia to deliver earnings of $2.18 a share this year, up 42% from 2014, on $1.8 billion in revenue. Growth stocks in the health care sector fell further than the broader market during this summer’s rout, and Acadia’s stock is down more than 20% from highs it hit in August. The stock still trades at 24 times projected 2016 earnings, but Turek has taken advantage of the dip to scoop up more shares; he thinks that Acadia’s growth prospects justify a valuation higher than those of less specialized health care providers.
Experienced management team
Staffing problems and patient-safety issues often crop up at for-profit mental-health facilities, and their operators face considerable scrutiny from regulators and consumer groups. In such a climate, experienced management matters, and most of Acadia’s leadership, including CEO Joey Jacobs, has been on board since before the company went public in 2011. Turek says the team’s experience shows in Acadia’s efficiency: Facilities at Acadia are typically about 80% utilized. Turek also says management is deft at converting new facilities to the “Acadia way of doing business,” as the company has been consistently accomplishing with its latest acquisitions.
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A version of this article appears in the November 1, 2015 issue of Fortune with the headline “Thoughtful play on mental health.”