Which Medical Services Leader is the Best Bet for Profits?
Marina 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), UnitedHealth Group (NYSE: UNH) and Express Scripts (NASDAQ: ESRX) are in a niche category of medical services. Should you invest in Air Methods to reap solid benefits in the future? Or do you think UnitedHealth can transform your investment into a profitable one? Is Express Scripts the right stock to invest in now? The following article focuses on the answers to these questions.
Air Methods is the largest provider of air medical transportation services in the U.S. With its fleet of 400 aircraft, this company serves more than 98,000 patients in 42 states, yearly. Currently, Air Methods is paying off its aircraft leases and reducing depreciation and interest expenses in order to increase productive use of revenues. There are $53 million of aircraft leases for 2013 while $108 million of lease buyouts have already been finished in the current year. This will allow the company to rethink its cash dividends and stock buybacks in order to make shareholder value greater.
In 2012, the UnitedHealth Group increased its business coverage by 1,055,000 people, with growth of 245,000 people in the medicare division. Healthcare reform caused an increase in the health insurance purchases. Thanks to that, healthcare providers and insurers will be able to anticipate consistent revenue growth, but may experience declines in profitability in the near future.
Express Scripts serves large companies and health plans and has become systemic to the pharmacy and drug manufacturer system with substantial negotiating power. In March, the company announced an aggressive 2013 stock buyback program. The company plans to buy back up to 75 million shares (around 9 % of outstanding shares). The cost of the program will be above $4 billion.
The 2012 year was very successful for Air Methods as it racked up an increase of 28% in total revenue, 100% in net income, and a 97.5% increase in diluted income per share. In that period, the stock has appreciated by a staggering 317.6%. Over the last twelve months, Air Methods had been doing exceptionally well until the first quarter reports were released.
A steep dip in the stock price at the 2013 point on the chart backs up my claim. The company’s CEO, Aaron D. Todd, blamed bad weather and a weaker pay mix as reasons for a weak first quarter. There is another alarming sign for Air Methods: its debt/equity ratio currently stands at 2.0.
UnitedHealth Group and Express Scripts are also rewarding stocks to hold - UnitedHealth more than Air Methods or Express Scripts since it offers a dividend. All three of these medical service providers are growth stocks as they have outperformed the market by around 100%. Contrary to the performance of the competitors and the market average rate of appreciation, Air Methods investors have struck gold over the past five years due to the 318.4% appreciation of the stock value.
Expectations for future
The impending Patient Protection and Affordable Care Act will prove to be very helpful for Air Methods. The act mandates that all Americans maintain a minimum level of healthcare coverage, which moves a nationalized insurance forward. Today, roughly 12% to 13% of transported patients do not have insurance coverage, from which the company collects very little.
As individuals gain more insurance coverage, the company will then be paid according to the insured transport rates, which are significantly higher than uninsured transport rates. The difference in collections between an insured patient and an uninsured one is approximately $17,000. Therefore, a 1% mix increase from self-pay to insurance adds approximately $0.44 in EPS for Air Methods. This should allow the company's earnings to expand continuously in the upcoming years.
I believe that ObamaCare might be beneficial for Express Scripts. The company's underlying business model is aligned with the government: contain end-user costs. This company is the smartest player in the pharmacy benefit management industry with the strongest management and utilization programs in hand. Express Scripts might benefit strongly from future industry growth, due to its dominance in the specialty industry, and a strong free cash flow margin.
To cut healthcare costs and expand healthcare coverage among American citizens, The Patient Protection and Affordable Care Act will bring 30 million Americans to the health insurance market in the next five years. Therefore, the PPACA will provide UnitedHealth with an opportunity to increase its enrollments over the next four years despite that its market share may face pressure from increasing competition.
I suggest Air Methods is a gamble, and it is a buy in the above-mentioned selection. There is no doubt in my mind about the growth potential of Air Methods stock due to the recent five-year price appreciation. Five years from now, I see this stock appreciating by more than a 100% again. First quarter results were a short-term glitch and I expect this company to return to its profitable ways so far.
Air Methods provides a good entry point, solid financials and growth potential for the remainder of 2013. However, a high P/E is indeed a concern. Being prudent and waiting for the stock to lose more value over this month can also be a viable option before buying into the stock.
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Marina Avilkina 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!