Air Methods Navigates To Grow Medical Flight Business

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When a big part of your business depends on unpredictable forces like the weather, how many emergencies happen and how medical bills get paid, you can expect a little earnings volatility.

When you experience earnings volatility, you can expect to see your stock price bungee up or down from time to time.

Air Methods ( AIRM ) has seen that happen more than a few times -- including twice in the past three months.

The company provides air medical transport and other services via a fleet of owned and leased helicopters and fixed-wing aircraft.

At the end of 2013, its fleet consisted of 264 company-owned aircraft and 136 leased aircraft.

Its Air Medical Services Division -- the largest air medical transport provider in America -- generates the lion's share of revenue.

Air Methods also has a Tourism Division that provides helicopter tours and charter flights in the Las Vegas/Grand Canyon region and in Hawaii. Another unit, United Rotorcraft, specializes in the design and manufacture of aeromedical and aerospace technology.

But the air medical unit drives Air Methods' financial performance -- and that business can be hard to predict.

Planning For Emergencies

Air Methods' medical business is divided into two basic service areas: hospital-based and community-based.

Its hospital-based division provides medical helicopter and airplane services, primarily on fixed contracts paid by hospitals.

With this business, Air Methods typically provides only the aircraft and the pilot.

The main challenge with the hospital-based business is that foul weather can hamper Air Methods' ability to transport patients.

"A lot depends on the weather -- whether you can actually go in and respond," said Richard Close, analyst at Avondale Partners. "Someone might call in for a helicopter, but if the visibility is really low you can't go out and get them. When it doesn't fly, it doesn't get paid."

The community-based service unit is designed to serve whole communities and operate independently of hospitals. Air Methods not only provides the aircraft and crew, but also critical-care medical staff trained in areas such as burns, cardiac, pediatrics, respiratory and trauma, and can help out with specialty-team transports.

This side of the business carries higher margins than the hospital-based division. It's even more volatile because in addition to having to deal with the weather, Air Methods must handle issues with medical care and billing.

As anyone in the health care business knows, billing for medical service doesn't necessarily mean getting the money.

"There's a big variance in net revenue based on the payer mix -- who has commercial insurance, who depends on Medicare, who has no insurance at all," Close told IBD. "Not everyone pays on time, or even at all. That dynamic has a really big impact."

Air Methods saw the good and bad of it during the first two quarters of 2014.

On Aug. 7, the company posted better-than-expected revenue and profit for the second quarter, and the next day its stock popped more than 12% to a record closing high of 59.81. Shares currently trade near 59.

Less than three months earlier, on May 9, its stock price sank nearly 11%, a day after Air Methods fell short of Q1 earnings views.

The results for both quarters weren't that surprising, Close says.

"Traditionally, Q1 and Q2 are a little more challenging with respect to weather, so there's more volatility there," he said.

Trends Lend A Lift

The good news for Air Methods is that its second-quarter results reflected positive trends for the company, says CEO Aaron Todd.

These include more hospitals outsourcing their transport services to a third party. "We've seen an acceleration of that activity, and in a great majority of cases our hospital partners have chosen Air Methods to outsource," Todd told IBD. "Second-quarter earnings reflect an underlying quality in that they were driven by positive trends and top-line expansion of more patients being transported."

Air Methods reported Q2 earnings of 73 cents a share, up 49% from the prior year and 7 cents above analysts' consensus estimates. Revenue gained 14% to $258.5 million, also beating views.

Revenue from the Air Medical Services Division rose 7% to $219.6 million, while tourism revenue nearly doubled to $31.4 million. Revenue from the United Rotorcraft unit climbed 51% to $7.4 million.

Second-quarter total patient transports rose 7% to just less than 15,000, while net revenue per patient transport also improved 7% to $11,353.

Much of the company's growth can be traced to the move by more hospitals to a community-based model to save costs, Close says.

"Under a community-based contract, the costs for clinicians and other expenses get shifted to Air Methods, which has to hire the nurses and paramedics," he said. "That's the advantage to the hospital, but it also has a positive financial impact for Air Methods."

Meanwhile, the company's tourism business continues to contribute a bigger portion of revenue. This business includes Sundance Helicopters, which Air Methods acquired in 2012; and Blue Hawaiian, which it bought last year.

Sundance operates helicopter tours of Las Vegas and the Grand Canyon. Blue Hawaiian offers tours on five of Hawaii's six tourist islands.

Expect this side of the business to keep growing.

"We would look to expand the tourism business through additional acquisitions and organic growth," CEO Todd said.

Analysts polled by Thomson Reuters expect Air Methods to boost full-year earnings 75% in 2014 and an additional 20% in 2015.

The firm is part of IBD's Medical Services industry group, which includes names such asExpress Scripts ( ESRX ), a provider of pharmacy benefit management services;Laboratory Corp. of America ( LH ), which provides clinical testing services; andQuest Diagnostics ( DGX ), a testing services provider. Air Methods holds the top Composite Rating in the group --95 of a possible 99.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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