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Colorado Ambulance Company Thrives On 911 Contracts And Natural Disasters

GREENWOOD VILLAGE, Colo. -- Hurricanes Ike and Gustav wreaked havoc on the Caribbean and U.S. Gulf Coast states in September.

But the disasters also brought a flood of third-quarter revenue for the for-profit ambulance system operator Emergency Medical Services.

The Greenwood Village, Colo.-based company provided ambulance and medical transports across the Gulf Coast as part of a contract with the Federal Emergency Management Agency.

The two storms contributed $101.1 million in revenue in the quarter, including $11 million in cost pass-throughs. That helped the company almost double earnings per share in the third quarter.

The FEMA contract and EMS' contracts with municipalities to provide emergency ambulance service is the larger and most visible part of the business. That part of the company, the American Medical Response unit, transported 3.4 million patients last year. The division accounted for 64% of third-quarter revenue.

Fastest Growth

But the EmCare unit -- outsourced emergency department and hospital-based physician services segment -- has faster organic growth and higher margins. It served more than 7 million patients last year, a number that's growing.

"You're seeing more and more hospitals look for ways to outsource those non-core areas," says Jefferies & Co. analyst Arthur Henderson. "It takes the burden of those noncore services off the hospitals' responsibilities list. These guys got the reputation and economies of scale to do that."

In the quarter that ended Sept. 30, the company posted EPS of 66 cents, up 94% from a year ago. Revenue climbed 28% to $679.3 million.

The American Medical Response unit contributed $425.3 million in revenue, vs. $254 million for the hospital outsourcing business.

Based on those strong third-quarter results, the company upped its guidance for this year. It now says to expect between $1.90 and $2 per share. It had previously called for $1.70 to $1.75. Analysts surveyed by Thomson Reuters had expected $1.91 per share.

The company believes ambulance services are a $13 billion-a-year market. There are more than 15,000 private, public and not-for-profit providers out there. EMS thinks it's the nation's largest with 8% of that total market.

The company believes the emergency department service market is a $10 billion-a-year industry. It thinks 65% of the nation's almost 5,000 hospitals with emergency departments have outsourced physician staffing and management. The company is one of a handful of national providers and has about 8% of that market as well.

EMS traces its routes to the founding of EmCare in Dallas in 1972. It expanded nationwide through a series of acquisitions in the 1990 s.

Its AMR unit formed in 1992 through the consolidation of several regional ambulance companies. It also grew with a series of more than 200 acquisitions. Laidlaw International acquired the two in 1997. A management and investor group, Onex Partners, bought out the two units in 2005 and brought the new company public later that same year.

Onex owns about three quarters of the shares, with 96% of the voting power. That limited public float has kept some institutional investors out of the shares. But the company has registered with regulators to potentially float another 10 million shares, which would help.

The company continues to make acquisitions, but it's also showing organic growth.

Its EmCare unit started 18 new contracts, including two for anesthesia services, a new business line for the company. Those contracts are collectively worth about $31 million in annual revenue.

Its contracts allow it to end deals that don't live up to expectations. It walked away from 25 deals during the quarter.

In addition to anesthesia, the company is also branching into other hospital services, such as emergency department nursing management. Those new services offer chances to sign new customers and cross-sell to existing ones.

On the AMR side, the company signed two new 911 contracts and 53 new interfacility agreements with combined annual net revenue of about $20 million. EMS plans to bid on several more 911 contracts in early 2009.

Goldman Sachs analyst Matthew Borsch doesn't think hospital operators are as defensive in this current recession as they were in the past. He notes rising bad debt associated with treating uninsured or underinsured patients. He suggests caution with EMS.

So far, though, the company says it hasn't seen a dramatic uptick in bad debt or underinsured patients. And its contracts with hospitals allow for subsidies to help cover those shortfalls. The company can walk from deals where hospitals can't pay.

Borsch and other analysts say there's potential for health care reform in an Obama administration that could ease some of those insurance worries.

EMS suffered from higher insurance and rising fuel costs in the third quarter. Fuel prices, though, have since fallen.

Natural Disasters

And that FEMA contract could be huge in some quarters. But it's lumpy, unpredictable revenue. The $101.1 million in the third quarter compares with about $11 million in revenue the year before from a much smaller deployment during Hurricane Dean.

EMS first signed that contract in 2007. FEMA realized it needed help evacuating hospitals and nursing homes after the disastrous responses to hurricanes Katrina and Rita in 2005.

In the August and September call-up, EMS deployed about 1,000 people, 600 ambulances and 50 aircraft over about five weeks to Gulf Coast states.

"While the FEMA contract is not going to provide consistent results each quarter, this is clearly a bigger opportunity than we anticipated," notes Oppenheimer analyst Michael Wiederhorn in a client note.

"Hurricanes will remain a problem in the Gulf states, and this contract will provide significant upside to our estimates, which continue to assume minimal contribution from this relationship."


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