Thursday, February 26, 2009

Marcial: Should Investors Call Emergency Medical Services?

Marcial: Should Investors Call Emergency Medical Services?

What's most in need of emergency rescue right now? Investors' battered portfolios might top the list. "There's no place to hide" has become a common refrain among investors amid the continued downdraft in equity markets. Surely, however, some skilled stockpicking in this volatile bear market should help, although that, admittedly, is just one of a bunch of tools for salvaging portfolios from further damage.

Against the current dire market conditions, some savvy pros are highlighting the stock of a company that provides emergency aid of the physical kind: Big Board-listed Emergency Medical Services (EMS), the nation's No. 1 provider of emergency services.

EMS' stock chart shows that the company has kept itself above water against strong undercurrents that have pulled down most other stocks. On Feb. 20 it traded at 35 a share, not far from the 52-week high of 39.11 reached on Jan. 5, 2009. Although it's still a relatively modest operation, with sales of $2.5 billion, profits have steadily grown from $20 million, or 55 a share, in 2005, to $84.85 million, or $1.97 a share, in 2008.

favored by demographics

Analyst Andreas Dirnagi of investment bank Stephens forecasts that EMS' earnings will climb to $2.10 a share in 2009 and jump to $2.42 in 2010; EMS earned $1.97 a share in 2008. He rates the stock "overweight" with a 12-month stock price target of 42. "We would encourage investors to accumulate shares on any material price or market weakness," advises Dirnagi.

He says EMS' two businesses—American Medical Response (AMR), which provides ambulance transport services, and EmCare Emergency unit, the largest contract management group providing hospitals with emergency department physicians—are thriving, even amid the recession and financial crisis.

Dirnagi expects EMS will benefit from the continued rising demand for ambulance services and physicians for emergency rooms around the country. EMS is well positioned to continue gaining market share in those two fragmented businesses, he says. Helping EMS' business is the demographic trend, mainly the aging population combined with the pattern of increased demand for health care and hospital emergency services.

"Even though EMS is already the largest provider in the ambulance market, it continues to grow at rates almost double that of the industry in general," says Dirnagi. And hospitals increasingly outsource emergency-room physicians. EMS is also gaining market share in this business as hospitals continue to slash costs, mainly through cutbacks in doctors and medical personnel. Hospitals save bundles by hiring EMS to provide emergency-room doctors, the analyst says. Dirnagi notes that EMS has 427 contracts with hospitals for such services, which account for some 47% of revenues.

onyx: a wild card?

EMS' fourth-quarter results of 48 a share beat analysts' consensus forecasts, with the EmCare business having a "standout" quarter, says Michael Wiederhorn of Oppenheimer (OPY), who rates EMS "outperform" with a price target of 41 a share. Most importantly, he adds, EMS issued a "very strong 2009 [earnings] guidance" in the range of $2.05-$2.15 a share, compared with Street estimates of $1.98. So the analyst increased his own estimate from $2.06 a share to $2.10 for 2009, and from $2.31 to $2.33 for 2010. (Oppenheimer has done nonbanking services for EMS.)

So why aren't all analysts who follow the company so charmed by the stock's rise and the viability of EMS' operations? Of the nine analysts who track EMS, only four rate it a buy, and three tag it a hold. Two others recommend selling the stock.

Here is one explanation from analyst Jeffrey Englander of Standard & Poor's, who rates EMS a hold: "While a number of positive fundamentals (consolidation of a fragmented market, an aging population, and increased use of outsourcing for ambulance and ER services) should aid results over the longer term, we remain cautious," in part because a private investment company, Onyx Partners, owns 78% of the stock and has voting power of 96%.

Onyx's interests, says Englander, "may not be aligned with those of minority shareholders." (Standard & Poor's, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)

The concern for some EMS watchers: Onyx may unload some or all of its stake to book profits. So far, Onyx hasn't sold shares. But Stephens' Dirnagi isn't worried about the Onyx holding. He notes that the group has filed a shelf offering to sell 10,000 shares, which he says is but a third of Onyx' holdings. "Onyx doesn't need the cash, and the offering apparently satisfies their current needs," explains Dirnagi. He points out that it wouldn't be in its best interest to just dump large amounts of the shares, as that would pull down the stock's price. He expects Onyx will act "appropriately and responsibly" if and when they do need to sell.

In the meantime, Onyx is making money on its stake, which it acquired in 2005 when EMS was spun off from Laidlaw International, which Onyx purchased. EMS went public in December 2006 at the price of 14 a share. With such winnings in the current environment, EMS has been one ambulance company worth chasing.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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