Description

In recent years, though strong organic growth and one meaningful acquisition, Air Methods has become a leading factor in the highly fragmented emergency air transport business. While earnings in 2003 have been penalized by very unusual weather conditions, the Company's outlook appears very well defined. At about 11x estimated 2004 EPS, and with a long-term EPS outlook of 17% to 22%, the shares appears to offer excellent risk/reward characteristics.

The Company operates under two distinctly different business models, which enable Air Methods to offer hospitals the ability to choose the plan that best suits their needs. The first approach is known as the Community-Based Model (and is expected to account for about two thirds of 2004's total revenues of $290 million). Under the CBM, Air Methods only derives revenues when they transport a patient. Generally, police, fire and/or emergency units determine the need for a helicopter transport and place the appropriate call. AIRM must respond regardless of whether the person being transported has the means (i.e. insurance) to pay for the transport. A typical transport costs $8,000, and insurance companies typically cover the full amount. On the other hand, Medicare/Medicaid only pays for around $3,000. The bad debt expense averages 20% of CBM's normalized revenues.

The Company has some 55 CBM's, staffed with 70 aircraft. For 2003, the Company opened 8 new bases and we would expect about the same number of openings for 2004. The cost structure at a CBM results in a transport having about an 80%/20% fixed/variable expense ratio. Demand for helicopter transports is relatively constant (although poor driving conditions does increase demand). The Company's ability to meet demand is very much influenced by the weather. Each of the Company's pilots make the decision whether the weather conditions are safe. When a transport is lost due to weather, this revenue loss can never be made up (obviously a 25% off sale does not impact demand). During 2003, the weather was unusually difficult resulting in a large number of transports "lost". Reflecting the high fixed cost content, the impact from the weather resulted in recently disappointing quarterly earnings.

The Company's other helicopter transport model in known as the Hospital-Based Model. Air Method's HBM's operates with some 50 hospitals encompassing some 105 aircraft. As opposed to the CBM, under the HBM methodology weather plays no role since the hospitals are billed largely on a fixed price basis. The October 2002 acquisition of Rocky Mountain more than doubled the size of AIRM's HBM operations. Significantly, the Company has had an excellent record in renewing its HBM contracts.

For 2004, we expect revenues of about $290 million with CBM revenues roughly twice those of HBM's. We anticipate an EBITDA margin of just over 12% (depreciation and amortization should be about $14 million); resulting in EBITDA of $35.5 million. Based upon a 7.5% operating margin and 39% effective tax rate assumption we expect 2004 EPS of $0.75 (versus an anticipated weather-impacted $0.52 for 2003).

The Company recently sold 1.2 million shares at $8, and barring a major acquisition should meet its financial needs from internally generated funds. The Company has just under 12 million shares outstanding, with 14% held by insiders.

The unusual weather of 2003 has created a means to purchase a very well-run company at a significant discount to its normalized growth rate.

Catalyst

Excellent quarterly year-over-year comparisons likely for the next several quarters.