Emergency Medical Remains Neutral - Analyst Blog

We recently reiterated our Neutral recommendation on Emergency Medical (EMS), a leading provider of emergency medical services in the US.

During the third quarter of fiscal 2010, Emergency Medical reported an EPS of $0.82, up 24.7% from $0.66 in the year-ago period. However, the EPS missed the Zacks Consensus Estimate of $0.85.

During the quarter, the company had to incur $3 million ($0.04 impact on EPS) of increased employee medical claim charges related to four large claims under its self-insured health plans. Revenues increased 10.8% annually to reach $737.2 million, which surpassed the Zacks Consensus Estimate of $729 million.

Although higher insurance charges are not expected to be a normal trend, guidance for 2010 was lowered owing to accounting norms, which do not consider these as one-time charges.

Emergency Medical has reduced the high-end of its previous EPS guidance by $0.04 to $3.20–$3.26 and adjusted EBITDA guidance to $317-$322 million (previous guidance of $321-$328 million). Another factor that led the company to lower its outlook was a conservative hospital outlook.

The company functions through two operating subsidiaries – American Medical Response, its healthcare transportation services segment and EmCare Holdings, its outsourced hospital-based physician services segment. Revenues from these segments increased 4% to $352.2 million and 18% to $385 million, respectively.

The bulk of the growth in the EmCare is attributable to the addition of 39 net new contracts since June 30, 2009. Revenue from existing contracts increased 1.4% despite a 0.9% decline in same-store patient encounters due to higher patient visits in 2009 related to the H1N1 virus.

Same-store patient encounter was up 7.2% during the third quarter of 2009. EmCare added 20 new contracts during the quarter (11 ED, 3 hospital, 3 radiology and 3 anesthesia) while 17 contracts were terminated. Five contract additions were cross sold to the company's existing customer base.

Despite a 6.4% rise in operating expenses, a 3.8% rise in insurance expense and an 11.8% rise in selling, general and administrative expenses, the EPS growth overtook revenues due to a 52.8% reduction in interest expense to $4.9 million.

The huge decline in interest expense was primarily due to the new credit facility arrangement entered in April 2010. We also note that long-term debt declined 8.6% to $410.3 million ($415.7 million at the end of the previous quarter) compared to $449.2 million at the end of December 2009.

We are optimistic about the future potential of the emergency medical services market as health authorities and government agencies are increasingly outsourcing these services for cost containment.

Moreover, the increase in the aging population will be a significant demand driver for healthcare services, thereby resulting in an increase in ambulance transports, emergency department visits and hospital admissions.