The Coolest Health-Care Stock You'll Never Buy

Helicopters are cool. What's even cooler is investing in companies that use helicopters. Companies like Bristow can give you some chopper exposure via the energy industry. But have you ever thought about what would happen if you had a medical emergency out in the middle of nowhere? How about in the middle of somewhere?

There are nearly 6,000 registered hospitals in the U.S. today, from the remotest of rural locations to the most crowded cities. Regardless, the shortest distance between two points is a straight line, and Air Methods (Nasdaq: AIRM  ) has been flying its ambulances in the air since 1982. Today, the company is the largest air medical emergency transport company in the country.

Did you say air ambulances?
It's pretty reasonable to assume that we will see steady population growth for the foreseeable future. In 1982, when Air Methods was founded, the U.S. population was around 230 million. Fast-forward to today, and estimates put the figure at 307 million. And with urban sprawl and big cities that grow more crowded every day, Air Methods will always have a market; there is just no substitute to taking to the air.

You said I won't buy it?
Air Methods is small. With a market cap of $530 million, it is hardly on the radar for most investors. Chances are that the first time you heard of the company was in reading this article. But small caps are very often where the big ones start out. Heck, at the end of 2000, Air Methods had a market cap of $27 million. In 10 years, the company has grown at a compound annual rate of almost 35%. Not too shabby for flying under the radar.

Know what is unknown
Not only is Air Methods small, but it is also almost unknown. In fact, there were only four analysts on the most recent earnings call for Air Methods. The one before that had three! Compare that to some of the big boys that garner 20 analysts or more, and you can see that it's tough to get the word out when nobody's listening. But that is precisely the time and place we as investors need to be looking: when and where others aren't.

That health-care legislation thing
This is one that has everyone's knickers in a knot, mostly because of the uncertainty it's created. And this uncertainty has sent investors fleeing. Medicare and Medicaid represent a significant portion of the patient mix for the company's services. And unfortunately, reimbursement rates are not all that stellar when it comes to these two red-tape factories.

It's not all bad
The flip side of the coin here is that Air Methods also collects a decent chunk of revenue from patients insured by private companies. And with big insurers UnitedHealth Group (NYSE: UNH  ) , WellPoint (NYSE: WLP  ) , and Coventry Health Care (NYSE: CVH  ) all working more in conjunction with Medicare and Medicaid, reimbursements actually stand some chance of getting better over time.

It is also worth noting that the company generates about 40% of its revenues from its hospital-based services. This revenue is more reliable as it is based on actual contracts with the hospitals.

Lead the way
While the company controls approximately 20% of the market today, there is still room for consolidation. And the hospitals and communities that are still doing it a different way present additional growth opportunities, as well. Management estimates the total market opportunity today to be about $2.5 billion and growing, which means room for Air Methods to grow its share of the pie.

Who runs the show?
Any investment requires a leap of faith that management is going to keep your best interests at heart. CEO John Todd has been with the company since 1995, serving as the CFO from 1995 to 2003 before taking on the CEO position, so he knows this business. That insiders own more than 10% of the shares outstanding tells me that they believe in the business and align their interests with shareholders.

Leaders rarely come cheap, and I have sat and watched Air Methods' quick ascent from $32 per share in August to $42 today. Trading at an EV/EBITDA of 8.5 is a little more on the expensive side for this company. And due to the capital intensive nature of the business, free cash flow can be a little lumpy. Still, considering the market they serve and the quality of management behind it all, I see Air Methods as a much bigger company 10 years from now -- that is, if they don't get bought out first.

A Foolish flight plan
I should have bought it when I had the chance. Knowing this market, though, I'll probably get another. Regardless, the country's population is growing and urban sprawl and traffic jams are the forecast for years to come. With a dominating national presence and a fleet full of choppers, Air Methods is looking at blue skies ahead.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Stock Advisor analyst Jason Moser owns no shares of any companies mentioned. UnitedHealth Group and WellPoint are Motley Fool Inside Value selections. Coventry Health Care and UnitedHealth Group are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a diagonal call position on UnitedHealth Group. The Fool owns shares of Bristow Group and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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