I have not posted on Air Methods for a while. This week I spent 3 hours at the company. In short, my visit confirmed my investment thesis.
Air Methods, the company has made spectacular progress in the past couple of years and is on a very nice trajectory in growth, both of sales and earnings.
The company would have achieved my previously stated expectation of in excess of 40 cents earnings in 1998, but for two factors.
The Sikorsky Blackhawk contract for 7 medical interiors has been delayed beyond the company's expectation by a squabble between Sikorsky and the US Armed Forces. That dispute will be settled sometime soon and the income is delayed, not lost. I think that we will see the missing 10-15 cents in 1999, maybe relatively early in the year.
The Wiring Harness contract has cost Air Methods about 4 cents this year and I am not expecting any funds to be recouped. A subcontractor's error generated the problem, but the resolution is complicated. And Air Methods wants to maintain a positive relationship with Sikorsky. I believe this was a one-time event and not predictive of any future problems.
Otherwise the financials are on track. Air Methods' quarterly income is subject to random variation in several areas, including hours flown (weather variable), maintenance expenses, collections for Mercy and the timing of manufacturing contracts. These factors tend to average out over several quarters. The company is on-budget for its flight operations and expansion.
Red Chip Review (RCR) has changed analysts for Air Methods three times. The current analyst has a different view of the income realized after the recent accidents than did the previous one. He subtracted the insurance settlement from earnings. But he does not credit against that loss the extra expenses accrued to the company in the several quarters after the crash.
In other words RCR's analysis does not present the financial performance of the company fairly. Period.
Other than the above two disappointments, we are on track and I expect the stock price to reflect the value in the coming months to years.
Two years ago the company was breaking even and sold for $3. Now they will make 30 cents or so this year and still sell for the same price.
Air Methods retained Patricof to help them consolidate the industry. They have developed a methodology to establish a value for similar companies they are looking to acquire. By those measures the company today, without any credit for the manufacturing division, is worth $6-8. My target of $10 is intact.
I expect some nice announcements in the coming weeks and my best guess for q3 earnings (due out about 11/10) is 8 cents per share.
My money is sitting tight. I would be buying more, but my position is already larger than prudent a fraction of my net worth.
Elliot
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