Bad weather, for most everyone, is rough and tough all around, but it is especially anathema to Air Methods (AIRM), the largest provider of air medical emergency transport services in the $2.5 billion market in the U.S. The inclement weather in recent months proved particularly nasty for the company as it, predictably, had a terribly onerous impact on its second-quarter earnings.
So in advance of its quarterly announcement scheduled for Aug. 4, Air Methods wanted to clear the air and prepare analysts and investors for the worst: On July 20, the company warned that second quarter earnings would be about 25% lower than the year-ago profits. That should have banged up badly Air Methods’ stock.
Guess what? It didn’t. The stock slipped just a tad, closing on July 20, at $73.29 a share, off from the previous day’s $74.94. And on July 21, the stock closed higher, to $74.79. Were it not for the protracted outrageous wrangling in Congress over the issue of lifting the nation’s debt limit, the stock could have continued to rally. But with the market down six days straight since July 22, the stock fell, as well, and closed on July 28 at $71.79.
But fret not, advises Andreas Dirnagl, managing director at investment bank Stephens, who follows healthcare services and tracks closely Air Methods. By now Wall Street is well aware that the company’s weather-related problems need to be regarded as a given – and a chance to buy more shares when they drop from bad weather-related cancellations for its services. And the dampening impact from the debt-level debate in Capitol Hill should equally be regarded as an added opportunity to buy the stock more cheaply.
Despite the expected drop in second-quarter results, Dirnagl remains bullish on the stock, rating it as overweight and, in fact, boosted his 12-month price target for the stock to $88 from $77. In spite of volatile-weather challenges, Air Method’s stock has been flying high. A year ago, the stock traded at $30.81 a share, a 52-week low.
Although Air Methods isn’t a household name and flying below most investors’ radar screens, some large institutional investors have discovered its stock and have bought shares.
Among the big early stakeholders are Jennison Associates, which owns 1.19 million shares, or a 9.42% stake; Fidelity Management, which owns 880.517 shares, or 6.96%; and BlackRock Institutional Trust, with 840,249 shares, or 6.64%; and Vanguard, with 579,536 shares, or 4.58%.
“We continue to believe that Air Methods is well positioned to thrive and expand in the industry, as it is able to drive further pricing increases, and use its capital structure to continue improving its fleet of helicopters, reducing maintenance cost, and buying more aircraft (instead of leasing them),” says Dirnagl. “These all add up to increasing operating (EBITDA) earnings,” he adds.
WEATHERING THE VOLATILE WEATHER
He says the drop in estimated earnings caused by bad weather issues is to be expected because of the high fixed-cost in maintaining the helicopters and other associated expenses. Even if its helicopters aren’t flying, the company still has to maintain its bases for the aircraft as well as the planes and crew.
Weather is inherently uncontrollable and difficult to predict, notes Dirnagl, but it is part and parcel of operating in the air emergency transport business. “Investors and analysts should continue to read through these cancellations and look at the strong underlying fundamentals of the business, particularly the company’s strong pricing power and the vital nature of the service,” says the analyst. In 2010, the company raised the price for its services by 18%.
Some 60% of Air Methods’ services in 39 states are community-based, generated mostly by 911 calls. The company uses 138 aircraft based on 114 locations for such community-based services. In addition, the company also provides services to hospitals on long-term contracts, using 167 aircraft stationed at 121 bases.
In June, Air Methods agreed to acquire Omnflight, the third largest air emergency service provider, for $200 million. The acquisition is expected to provide significant synergies and boost Air Methods’ earnings capabilities.
Analyst Ryan Daniels of investment bank William Blair figures that Omniflight will potentially add $1 a share in earnings to Air Method’s bottom line in 2012. He estimates that Air Methods’ earnings could approach $5.50 to $5.75 a share in 2012, vs. 2011’s estimated $3.66, up from 2010’s $3.50. Daniels rates the stock as outperform.
Also bullish on Air Methods is Kevin Campbell, analyst at Avondale Partners, who believes the consensus expectations are “too low” (at $4.52), as the upside from the pending Omniflight acquisition “is greater than anticipated.” Rating the stock as outperform, Campbell puts his 12-month price target at $85, based on his estimated 2012 earnings estimate of $5 a share, on expected revenues of $630 million. Estimated revenues for 2011 are $585.8 million, up from 2010’s $562 million.
For the third quarter of this year, management projects a return to growth in total transports, compared with the prior-year’s third quarter. This time, this good news on its growth outlook is partly based on the weather. Predictions are the third quarter will see “more moderate weather conditions.” So current estimated earnings and revenues may, indeed, prove too low.