Here's Why AAC Holdings Lost Over Half Its Value Today

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What happened

Shares of inpatient and outpatient substance-abuse treatment service provider AAC Holdings (NYSE: AAC) are getting rocked today after third-quarter 2016 earnings were released. The stock ended the day down 51.2%.

So what

Something really bad must have been revealed for a drop like that, but investors have to dig quite a bit. The basic metrics look great. Client admissions were up 65%, average daily residential census increased 52%, outpatient visits increased 253%, and total revenue trekked 23% higher compared to the prior-year period

There were some not-so-good numbers, too. EPS of negative $0.11 was dramatically worse than EPS of $0.04 posted in last year's third quarter. Of course, falling profits alone weren't enough to tank shares, but the reason for the EPS decline was.

AAC Holdings told investors that average daily residential revenue dropped 21% in the year-over-year period, or from $973 to just $768. That takes a significant bite out of increased admissions. But it actually gets worse.

The company generates significant revenue and drug-testing services, which is a much higher-margin business than inpatient and outpatient treatment. In 2015, the company generated 30% of its revenue from point-of-care drug testing. While it hasn't reported the percentage of revenue derived from the same segment for the first nine months of 2016, it did say the contribution "decreased" during the quarter.

The number likely will be reported in more detailed SEC filings, but investors weren't waiting to find out specifics. Why? It's very likely that AAC Holdings' inpatient and outpatient services are only possible as a business because of the ability to generate sizable margins with point-of-care drug testing. If average daily revenue is falling at the same time drug testing revenue is dropping, then investors are in store for some ugly losses. That's exactly what happened with EPS in the third quarter of 2016 -- and it could keep getting worse.

Now what

The high growth and seemingly high profits of AAC Holdings made it an interesting growth play for investors not long ago. Unfortunately, the fine print of the company's business model hinted that the wheels could fall off if the right mix of conditions were met. Well, that's what's happening right now -- and investors are fleeing.

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Maxx Chatsko has no position in any stocks mentioned. Follow him on Twitterto keep up with developments in engineered biology and materials science.

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