3 small companies you can bank on
These are the businesses helping the US get back on its feet. Some might be the large caps of tomorrow.
By Will Ashworth
Forbes' annual list of America's 100 best small companies hit the Internet Oct. 17, and, as usual, it's a most interesting group. You can invest in boring businesses like General Electric (GE), or you can live a little and pick up some shares of OpenTable (OPEN) or some other company on the list.
These are the businesses helping America get back on its feet. In some cases, they're the large caps of tomorrow. I like a number of them. Here are my three favorites from the top 25.
I live in the province of Ontario. For most of 2011, the Ornge air ambulance service, funded with taxpayer money, was embroiled in a massive scandal that ended with the CEO's resigning. For this reason, I'm especially interested in my first selection. Operating in 43 states, Air Methods (AIRM) is the largest air medical-transport service in the U.S. It transported 115,000 patients in 2011.
By comparison, Ornge transported just 19,000, albeit in a single province. Air Methods got its start in 1980 with one Bell 206 helicopter serving a hospital in Grand Junction, Colo. Today, it has 434 aircraft, including 413 helicopters. As of June 30, its trailing 12-month revenue was $750 million, $130 million higher than its three largest national competitors combined. If you're in the hospital business, you know who Air Methods is.
I like it because of its consistent revenue and profits. It has increased revenue for 10 consecutive years, growing from $92 million in 2001 to $661 million in 2011. Net income has had a slightly rougher ride, increasing on just five occasions. However, AIRM made a profit in all 10 of those years.
On no occasion was its net margin less than 3.3% (2008), and more often it's around 7%. Free cash flow for the trailing 12 months is $175.4 million, more than double fiscal 2009, which allows it to pay off aircraft leases and long-term debt. That frees more cash to acquire other smaller players, which further increases its market share advantage.
As the Ornge air ambulance service demonstrates, it's not easy to operate this type of business, and yet Air Methods executes almost flawlessly.
That has led to its stock achieving an annual total return of 33.4% as of Oct. 24, compared to 7% for the S&P 500. Currently trading at $108.50, it announced Sept. 28 that the board had approved a three-for-one stock split, subject to shareholder approval on or around Nov. 19. Expect overwhelming support for the proposed split. This gives you a month to research it more closely.
I'm one of the least technically inclined people you'll meet. Turning on my computer is about as tech-savvy as I get. So, it's odd that my second selection is IPG Photonics (IPGP), a company that manufactures fiber lasers, which I've learned are more complicated than regular ones. Who knew?
Some of their uses include cutting fine, intricate cardiovascular stents, welding thick steel, hardening turbine blades and many other industrial applications. Versatility is IPGP's middle name.
Twenty-two years young, the Massachusetts company describes itself as the No. 1 supplier in the rapidly growing fiber-laser market, using a vertically integrated business model and first-mover advantage to reduce costs, control quality and maintain and grow market share.
That philosophy has helped it grow from a market cap of $700 million at the time of its IPO in December 2006 to $3 billion today. Going public at $16.50 a share, its stock gained 55% on its first day of trading and another 133% since then, compared to a slight loss for the S&P 500.
Where to from here?
If second-quarter results are any indication, I'd expect more of the same. Revenue grew 13% to $137.9 million; operating income soared 22% to $56.4%; operating margins hit 40.9%, 310 basis points higher than the same quarter in 2011; and earnings per share jumped 14% to 72 cents. Analysts expect earnings per share in fiscal 2012 of $2.94 and $3.38 in 2013, a forward price-to-earnings ratio of 17.6.
Like Air Methods, IPGP is a model of consistency, not to mention very conservatively financed. Its future appears bright.
My final selection calls itself a travel company, but it's first and foremost an airline that takes passengers from small towns like Plattsburgh, N.Y., and Billings, Mont., to fun places like Las Vegas and Maui. I first learned about Allegiant (ALGT) in 2009 when it was No. 2 on Forbes' annual ranking. Back then I noticed that Allegiant had a diversified business model that generated revenue from scheduled flights, fixed-fee charters for Caesars Entertainment (CZR) and third-party products like hotel rooms, rental cars and show tickets.
Nothing has changed. Focusing 100% on the leisure customer, Allegiant is able to stand out from the competition. Equally important is the commitment of CEO Maurice J. Gallagher Jr., who owns 20.3% of the company. He held some of its debt when Allegiant went bankrupt in December 2000. Putting together a new management team and injecting some capital, he's been at the helm ever since.
What's to like about its business?
- It's been profitable for 39 consecutive quarters.
- It has $390 million in cash, more than double its debt.
- Its debt is one times EBITDA, compared to two or more for Southwest (LUV) and Delta (DAL).
- It provides air transportation for smaller, underserved markets.
- The leisure customer is much more dependable than business flyers.
- It has very few overlapping routes with competition.
- Since 2008 its pretax margins have more than doubled to 15.9%.
- It has some of the industry's best margins.
Third-quarter revenue increased by 17.2% to $686 million, with an operating profit of $107 million. Despite the third quarter being its weakest, Allegiant managed to deliver earnings per share of 87 cents, a 78% increase year-over-year.
Currently trading at a price-to-earnings ratio of 20.4, you might consider it quite high compared to its peers. Think again. Back out the cash per share from its stock price, and it's in the ballpark with far more growth potential than any of its peers. I love its business model.
As of this writing, Will Ashworth didn't own a position in any stocks mentioned here.
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