Wednesday, February 10, 2016

34th AIM student equity update by Dan Kralovec, Air Methods (AIRM) An air medical transportation services firm that is ready to ascend!


Air Methods Corporation. (AIRM, $38.87): “Can Acquisitions provide sufficient tailwinds going into FY16”

By: Daniel Kralovec, AIM student at Marquette University

Image result for air methods logo

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

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