$16 Million CEO Buy

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

Charlie Munger often advised investors to go to where there is little or no competition. That is why I like to search for investment opportunities in micro and small cap stocks, which often have little or no analyst coverage. The investment opportunity often comes when the insiders of those micro and small cap businesses buy the companies’ stocks in the market. This is currently the case with PHI Inc (NASDAQ: PHII). Al A. Gonsoulin, the Chairman and CEO, has purchased 503,665 shares at the price of $31.78 per share, with a total transaction value of more than $16 million. It accounted for 3.3% of the current total market capitalization of $482.5 million. With that huge CEO buy, should investors buy in as well?

Business Snapshot

Since 1949 PHI has been a helicopter transportation provider to the oil & gas industry, hospital for emergency services, and US governmental agencies. In the end of 2011, PHI had 259 aircraft, 167 of which were dedicated to oil & gas segment customers, including Shell Oil, BP, ConocoPhillips, ExxonMobil, and ENI Petroleum. Over the last 3 years, the majority of PHI’s revenue has come from the Oil & Gas segment, accounting for around 65% - 67% of its total revenue; whereas the Air Medical segment accounted for 31% - 33% of total revenue.

Historically Positive Operating Income and Cash Flow, but Fluctuating

In the last 10 years, on the base of increasing sales trend, PHI has managed to deliver consistently positive operating income and 9 years of net profits. However, the EPS and the operating cash flow generated have fluctuated quite a bit. 

<img src="http://media.ycharts.com/charts/ee58090fc858768b80ffb1d9fe3463b7.png" />

It is a low margin business, with low return on equity. During the same time period, its margin has been hovering between 0.9% to 5.8%, and the return on equity has fluctuated in the range of 1% to 8.8%. Trailing twelve months, the margin was 2.9% and its ROE was 3.7%.

Decent Debt Level to Finance High PPE, Which Requires High CAPEX

Because PHI owns aircrafts and uses its assets to provide the services to customers, we can expect that PHI would book large PPE (including aircrafts purchases) in its balance sheet. Because of the large PPE item, in order to stay competitive PHI needs to reinvest a good portion of cash to maintain those aircraft for future services to customers. Thus, the free cash flow would be dampened due to those high capital expenditures. Indeed, over the past 10 years, even though with consistently positive operating cash flow, the free cash flow has been negative for 10 years because of high capital expenditure.  

So how does PHI finance its aircraft? The company has financed its aircraft via both equity and debt financing; as of September 2012, it had nearly $500 million in stockholders’ equity, only $74 million in cash, and nearly $370 million in long-term debt. Thus, the low net margin was due to two main factors: the depreciation of the aircraft and the interest expenses it had to pay yearly.

Not the Most Attractive Candidates

Compared to its peers, including Air Methods Corporation (NASDAQ: AIRM) and Bristow Group (NYSE: BRS), PHI is not an outstanding performer.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>PHII</strong></p> </td> <td> <p><strong>BRS</strong></p> </td> <td> <p><strong>AIRM</strong></p> </td> </tr> <tr> <td> <p><strong>Net margin (%)</strong></p> </td> <td> <p>2.93</p> </td> <td> <p>6.57</p> </td> <td> <p>10.16</p> </td> </tr> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>2.13</p> </td> <td> <p>4.06</p> </td> <td> <p>11.24</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>0.7</p> </td> <td> <p>0.5</p> </td> <td> <p>1.3</p> </td> </tr> <tr> <td> <p><strong>EV/EBITDA</strong></p> </td> <td> <p>8.4</p> </td> <td> <p>10</p> </td> <td> <p>7.87</p> </td> </tr> <tr> <td> <p><strong><span>Div</span> yield (%)</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>1.4</p> </td> <td> <p>N/A</p> </td> </tr> </tbody> </table>

Its net margin and return on invested capital is the lowest among the three, and PHI is not paying any dividends currently. Only Bristow is paying 1.4% dividend yield to its shareholders. Air Methods enjoyed the highest margin and return, 10.16% and 11.24%, respectively, much higher than those of Bristow and PHI. It is also valued at the cheapest valuation, only 7.87x EV/EBITDA, whereas it’s 8.4x for PHI and 10x for Bristow.

My Foolish Take

Maybe Gonsoulin, the chairman and CEO, is seeing something different in the company. However, Air Methods is the most attractive company among the three in terms of operating figures and financial valuations.


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Air Methods. 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!

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