Air
Methods Corporation. (AIRM, $38.87): “Can Acquisitions
provide sufficient tailwinds going into FY16”
By:
Daniel Kralovec, AIM student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
•Air Methods Corporation. (NASDAQ:AIRM) operating through its subsidiaries
provides air medical transportation services and systems in the United States.
AIRM operates an Air Medical Services (AMS) segment (86% ~ total revenue),
Tourism segment (11.5%), and a United Rotorcraft (UR) segment (3%). Through the
medical services segment, the firm transports persons requiring intensive
medical services to highly skilled trauma centers thoughout 41 states. The
tourism segment provides helicopter tours and charter flights, primarily
focusing on Grand Canyon and Hawaiian Island tours. The rotorcraft segment
designs, manufactures, certifies, and installs modular medical interiors,
multi-mission interiors, and other aerospace and medical transportation
products for customers.
• AIRM is coming off a strong
third quarter with positive revenue and earnings growth, despite a sharp
decline in the share price over the past year.
• The recent acquisition of
Tri-State Flight Care, a critical care transportation business, extends the
firm’s reach within the southwestern United States. ~ added 27 more planes to
their already extensive fleet.
• Management has indicated that
it will offer a plan to boost shareholder value in the 'near term'. This plan
could very well include either an increase in stock buybacks, more
acquisitions, or exercising early lease buy-out terms.
Key
points: Air Methods quarterly earnings tend to be quite volatile due
to many external factors such as weather and fuel/maintenance costs. Nonetheless,
AIRM’s 3Q15 results beat consensus estimates. Revenue grew by about 12% compared
with the prior-year quarter while earnings per share grew almost 36%, reaching
$1.18. This was mainly due to an increase in revenue from both the tourism and
medical services segments.
Air Methods Corp recently acquired
Tri-State Flight Care LLC for $222.5 million. Similar to Air Methods AMS
segment, Tri-state is a critical care transportation provider servicing
Arizona, New Mexico, Nevada, and Colorado. This acquisition significantly
broadens AIRM’s presence throughout the southwestern United States, adding 27
planes to their existing fleet of roughly 400+ planes. The transaction is
expected to add $0.20 and $0.30 to earnings in FY2016 and FY2017 respectively.
In light of this recent acquisition, the firm renegotiated their credit
agreement, gaining access to another $400 million, thereby improving liquidity.
Management intends on using this credit facility to repurchase shares, continue
acquiring accretive businesses, or exercise early lease buy-out options. To
date, no shares have been repurchased.
Regardless of whether a patient
is insured or not, Air Methods will still provide patient transport services.
It is for this reason that the firm bears collection risks for services
provided to insured and uninsured patients. Net reimbursement per transport increased
7.2% in FY14 when compared to the previous year. Although positive, the
fluctuation in this figure may vary due to changes in the firms pricing
structure, pending and future legislation, as well as the overall health of the
U.S. economy. In the near future, it will be interesting how future healthcare
reform affects the firm’s reimbursement levels and customer breakdown.
What
has the stock done lately?
Since the last quarterly
update, the stock is down almost 7.5%. The current price of $38.87 sits on the
lower end of the 52 week range ($32.81-$54.98). Since AIRM released its intent
on acquiring Tri-State back in October, the stock hasn’t moved much. Short
interest still remains a cause for concern sitting at 33%. A positive catalyst,
besides another acquisition, is definitley needed to increase the value of this
company’s shares and boost investor confidence.
Past
Year Performance: AIG has decreased 7.6%% in value over the past
year, but the stock is nonetheless appears to be a bargain play when considering
a consensus of analyst estimates. With a target price of $54.60, the current
market price implies an upside of roughly 30%. In light of this figure, it
should be noted that insiders have been shedding shares over the last few
months while hedge funds have increased positions.
Source:
FactSet
My
Takeaway
While third quarter results
beat overall estimates, Air Methods’ stock has performed rather poorly over the
past year. The recent acquisition, enhanced credit facility, and potential
share buyback program are definitley positives for investors that are
frustrated with the slow growth of this company in recent periods. However,
despite management’s new initiatives, the increasing short interest and
presence of hedge funds coupled with insider selling might cause the stock
price to remain within the lower bound of the 52 Week range. It is for this
reason that I suggest we pay close attention to AIRM as FY16 progresses. It’s
too early to place a buy/sell recommendation on this stock. The firm still has
a few promising growth opportunities.
Source:
FactSet
