Why Air Methods Could Keep Soaring

This helicopter operator dominates its competition. Its entry into the tourism market looks like it is payoff off. Will the shares fly as high as its helicopters?

Jul 9, 2014 at 5:18PM

Air Methods (NASDAQ:AIRM) is in a unique niche market.

Defender

As its name suggests, the company is in the helicopter business. While it might not be a household name, it is the largest provider of air medical transportation services in the U.S. 

It has two primary segments: Air Medical Services and Tourism.

Air Medical Services
This is the company's primary business, representing around 86% of total revenue. Air Medical Services involves medical evacuations (MedEvacs) for patients with serious injuries. In 2013, 102,000 patients in 42 states used the company's Air Medical Services.      

Potential growth drivers
The company has made several recent acquisitions to fuel its growth. It recently acquired Baptist LifeFlight, which will add additional bases to its core business. 

The Air Medical Services division receives its revenue from a variety of customers, with a payer mix that breaks down like this: 

  1. Private insurance (33%)
  2. Medicare (33%)
  3. Medicaid (21%)
  4. Uninsured (13%)

Ideally, the company prefers customers to have some type of insurance coverage.

The impact of Affordable Care Act, also often referred to as Obamacare, remains unknown. But the company believes it should be an overall positive benefit once it is implemented in the coming years, as more customers will be insured -- thereby hopefully improving collection rates (which are by far the highest with private insurance, according to the firm).

Also, it is assumed that if the economy is recovering, more people are employed, thereby hopefully meaning more people will have private insurance. 

The overall revenue is very sensitive to which category of insurance the customer belongs to. Regardless of which category the uninsured customers will shift to, management feels confident that the percentage of uninsured customers will decrease.

Tourism
The Tourism business segment began less than two years ago as a new operating segment to diversify its business. So far, it has been performing strongly, contributing to 11% of overall revenue as of Q1 2014 compared to 6% in the same period last year. 

Back in 2012, the company acquired Sundance Helicopters for $44 million. The following year, it purchased Blue Hawaiian, the largest tour operator in Hawaii, for $25 million. Together, these two tour operators have a fleet of 50 helicopters in two fast growing markets. Both regions in which they operate have minimal seasonality and continue to grow. The revenue from its tourism operations this year is projected to be around $100 million. 

Bluehawaiian

Las Vegas had more than 40 million visitors in 2013, just shy of the record set in 2012. The destination in the desert continues to offer visitors alternatives to gaming over the decades, creating a niche market for helicopter tours. In addition to The Strip, it provides VIP tours of the Grand Canyon and Hoover Dam as well. More than 200,000 guests enjoyed breathtaking views from above in 2013. 

2013 was a record year for Hawaii as well. The islands welcomed more than 8.2 million visitors spending $14.5 billion. Blue Hawaiian has been a tour operator for 29 years, providing unprecedented experience and service. Its website showcases its numerous awards and has reviews from more than 25,000 customers. That's quite a reputation. 

Blue

Risks
There are a lot of risks investors needs to consider, including: accidents, weather, regulations, fuel prices, etc. In 2011, an Air Methods helicopter crashed, killing the pilot and three passengers. The cause of the accident was ruled by the NTSB as pilot error, concluding that texting while flying might have been the cause. These risks are significant and can result in fines and suspensions of operations. Every incident could also lead to higher overall insurance costs for the company. 

Foolish Takeaways
Air Methods is a solid company operating in a solid business. Both operating segments have performed well, giving investors exposure to the health care and consumer markets. The company does not have many competitors in the space that have the same reputation and service -- so take a look and see what you think about this intriguing stock.

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Mike Fee has no position in any stocks mentioned. The Motley Fool recommends 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.

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