For This Stock, It Is Hold or Get Ready to Move In

Naomi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Air Methods (NASDAQ: AIRM) is a global leader in air medical transportation and has been in the business for three decades. The company has more than 300 operation bases serving 48 states, in addition to eight maintenance centers and a national communications center. The firm’s stock has been undergoing heavy selling, and there are signs that the stock is oversold at this point.

Air Methods shares closed on June 26, 2013 trading at $34.95. The heavy selling of the firm’s shares by investors can be attributed to the company's poor performance in the first quarter of 2013, particularly the dismal $0.16 net loss per share posted compared to analysts’ estimates of an earnings per share of $0.32. The stock's 52-week high stands at $50.61, while its 52-week low is $35.19. That’s a clear sign that the stock is currently oversold. You can get a good picture of whether this stock is overvalued by looking at how related industries are performing. The company accounts for 1.99% of S&P’s Small-Cap Health Care Portfolio, which is currently on an upward trend.

Compare the firm’s stock with close competitors like UnitedHealth Group (NYSE: UNH), which is trading at $64.78 and steadily climbing since March, and Express Scripts (NASDAQ: ESRX), which is trading at $61.38 and also climbing since May. These two medical services companies are much larger than Air Methods, with market caps of $67.4 billion for UnitedHealth Group and $50.78 billion for Express Scripts compared to just $1.4 billion for Air Methods. Despite this, they are Air Methods’ biggest competitors in its market segment. 

Recently, UnitedHealth Group was in the news as community leaders in Santa Fe and Las Cruces celebrated the official grand opening of two rental housing developments. The rental housing developments are the products of UnitedHealth Group’s $22 million investment in collaboration with a leading advocate for affordable housing, Enterprise Community Investment. There is also an additional housing development being undertaken in Deming – all thanks to the same collaboration.

Express Scripts witnessed an increase of +1.21% in the early part of June after S&P lifted the firm’s outlook from Negative to Stable. The firm was recently rated as the no. 49 most-shorted Nasdaq 100 component, a spot formerly occupied by Viacom which is now in spot no. 62. On June 27, 2013, it became the day’s featured Health Services winner as it rose 1.2% to $62.11 per share on light volume.

Air Methods’ earnings estimates

<table> <thead> <tr><th> <p><strong> </strong></p> </th><th> <p><strong>Current Qtr.</strong></p> <p><strong>06/2013</strong></p> </th><th> <p><strong>Next Quarter</strong></p> <p><strong>09/2013</strong></p> </th><th> <p><strong>Current Year</strong></p> <p><strong>12/2013</strong></p> </th><th> <p><strong>Next Year</strong></p> <p><strong>12/2014</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Average Estimate</strong></p> </td> <td> <p>0.56</p> </td> <td> <p>0.84</p> </td> <td> <p>1.90</p> </td> <td> <p>2.84</p> </td> </tr> <tr> <td> <p><strong>Low Estimate</strong></p> </td> <td> <p>0.40</p> </td> <td> <p>0.72</p> </td> <td> <p>1.66</p> </td> <td> <p>2.31</p> </td> </tr> <tr> <td> <p><strong>High Estimate</strong></p> </td> <td> <p>0.73</p> </td> <td> <p>0.95</p> </td> <td> <p>2.20</p> </td> <td> <p>NA</p> </td> </tr> <tr> <td> <p><strong>Year Ago EPS</strong></p> </td> <td> <p>0.83</p> </td> <td> <p>0.71</p> </td> <td> <p>2.41</p> </td> <td> <p>1.90</p> </td> </tr> <tr> <td> <p><strong>EPS Growth</strong></p> </td> <td> <p>-31.77%</p> </td> <td> <p>18.32%</p> </td> <td> <p>-21.24%</p> </td> <td> <p>49.47%</p> </td> </tr> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong> </strong></p> </td> <td> <p><strong> </strong></p> </td> <td> <p><strong> </strong></p> </td> <td> <p><strong> </strong></p> </td> </tr> </tbody> </table>

The negative growth for the current quarter and the current year are based on comparable periods in 2012.

Air Methods numbers - Inclement weather to blame for a dismal performance

Air Methods released its first quarter 2013 results on Mar. 31, 2013; they were lower than expected and mainly attributable to foul weather. Revenues for the quarter fell 6% to $179.2 million compared to the previous quarter's revenues of $190.8 million. The company posted a net loss of $5.7 million in the period, or $0.15 net loss per share. These results represent a considerable drop from the first quarter of 2012 when the company recorded a $12.5 million net profit, or $0.32 earnings per diluted share. Compare that to average analysts’ estimates of $0.32 earnings per diluted share. Air Methods’ 2013 results include the results for Sundance Helicopters which it acquired on Dec. 31, 2012. Sundance posted revenues of $10.4 million in the first quarter of 2013 and a pre-tax profit of $ 0.1 million. From these figures, it is clear that Sundance did not play a big role in the firm’s poor performance since its revenues account for just 5.8% of total revenues.

Air Methods makes the bulk of its revenues from airlifting patients from hospitals. Community-based transports stood at 11,845 for the quarter, representing a 7% decrease compared to the previous quarter. Same-base transports fell 9% to 1,081. Cancellations due to bad weather shot up by 427 transports. Requests by customers for community-based services for bases that are open for more than one year fell by 6%. Flight hours fell 5%. Net revenues per community-based transport fell by 10% to $9,098 from the previous quarter’s $10,072. The shortfall was attributed to deterioration in payer mix, although this was partially aircraft and helicopters offset by increased prices. Maintenance expenses for the firm’s fleet of 400 fixed-wing aircraft and helicopters were kept reasonably low, and grew by just $0.5 million - a 2% rise from the previous quarter’s levels. Fuel expenses per flight hour, however, shot up whopping 19% compared to the previous quarter.

Poor weather conditions and a weaker pay mix are the two main factors that Air Methods’ CEO Aaron D. Todd singled out as having wreaked havoc on the company’s performance. Thankfully, the weather is expected to improve significantly in the coming months and the firm can look forward to brighter days. Todd injected a note of caution when he expressed guarded optimism for the company’s financial outlook by intoning that other factors could be to blame for the dismal performance in the first quarter as well. These factors might also come to play in the remaining trading period.

Forward-looking statements

What should investors expect of Air Methods in the remaining three quarters of 2013? Estimates for second-quarter earnings per share are $0.56, which is a huge improvement over the first quarter net loss of $0.16 per share. Average earnings per share for 2013 is expected to $1.90, which means that the fourth quarter's estimated earnings per share is expected to be over $2.00. There are a few factors that could negatively impact on Air Methods’ performance. Some of these are:

  • The size, growth and structure of the firm’s United Rotorcraft Division and Air Medical Services
  • Patient transports collection rates
  • Weather conditions
  • Medical Services Contracts renewals
  • Increased regulation of Aviation Industry and the Health Care Industry
  • How the "Patient Protection and Affordable Care Act" will impact on its business


Of all the above factors, the single factor likely to have the biggest impact is the prevailing weather conditions in the coming months. Current weather predictions say that we are likely to see fair weather for the remaining six months of the year. Unless lightning strikes twice and Air Method goes on to miss analysts’ estimates by a wide margin again (a highly unlikely scenario), we can therefore say with a fair degree of certainty that Air Methods is likely to see positive growth in revenues and earnings in the remaining three quarters of 2013. The stock is likely to be bullish in the short to mid-term. If you own this stock, please hold or buy if you don’t already have it in your portfolio.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Naomi Warmate-Igwe has no position in any stocks mentioned. The Motley Fool recommends Air Methods, Express Scripts, and UnitedHealth Group. The Motley Fool owns shares of Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus