Helicopter Trio

03/05/2014 10:00 am EST

Focus: STOCKS

John Persinos, of Personal Finance, looks at a sector with high-flying potential—helicopters—and highlights a trio of plays in medical transport, offshore drilling platform services, and manufacturing.

Steve Halpern: We're here today with John Persinos, editorial director of Personal Finance, as well as his parent Web site, Investing Daily. How are you doing, John?

John Persinos: I'm doing great. Thanks for taking the time to speak with me. I'm looking forward to this.

Steve Halpern: Most listeners would likely be perplexed when first hearing that our topic today is a very specific industry sector, whose upside catalysts include, both Obamacare, and offshore drilling. That's an unexpected combination. Perhaps you could explain what area both of those are focused on.

John Persinos: Sure. Well, you know, we're talking about helicopters right now, and that is a sector that I would, daresay, most investors don't think about, don't realize that there are good investment opportunities there. It's given the short shrift by Wall Street.

It's considered, sort of obscure and esoteric, but, actually, helicopters are a very important product city enhancing tool, they're lifesaving tools and they are vital for the offshore oil industry, and they're vital for Emergency Medical Services. Emergency Medical Services forecast a boom over the next two years.

They've already been on an upward trajectory, and expansion of medical care under Obamacare, under the Affordable Care Act, will increase the use of Emergency Medical Services, and a key tool in the Emergency Medical Services is the helicopter.

And as the oil patch—the energy patch—continues to grow, companies are drilling ever farther, ever deeper offshore, deep water and ultra-deep water drilling is becoming more prevalent. That means that oil companies need to get workers back and forth to the oil rigs, and the only machine capable of getting workers out to an oil rig and back again quickly and safely is the helicopter.

So, Obamacare and increased offshore drilling will both fuel growth in the helicopter sector. Those are two main catalysts, and you're right, a lot of people aren't connecting the dots, and they may be surprised to hear that, but those are definite multi-year trends.

There are other factors fueling growth in the helicopter business. One is the resurgence of aerospace in the wake of the 2008/2009 great recession, aerospace was in a severe slump, and then it took another hit after 9/11, but now, as global economic recovery is firmly on track, commercial and defense aviation is booming.

Most analysts predict record profits for airlines in 2014, and that's no small feat because the airlines tend to suffer from razor-thin profit margins, but there is more and more demand for air travel, especially in emerging markets where there is a rising middle class—consumers in China and in the adjacent Asian countries, and in other emerging markets—there's going to be more money in their pockets.

They are pursuing what they see as a good life in the west, and that means air travel, that means buying tickets. That's fueling prosperity in aviation, which is rebounding to helicopters favor.

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Militaries around the world are ordering more and more helicopters, and helicopters also play a role, not just in offshore oil drilling and in Emergency Medical Services, but they play a role in civilian transport as well. That sets the table for big growth of the helicopter business moving forward.

Steve Halpern: Let's look at a few individual stock situations that happen to these trends you discuss. First, in terms of the healthcare sector, let's begin with Air Methods (AIRM). What's the story here?

John Persinos: Air Methods is the largest publically traded EMS operator in the world. It is considered the gold standard for medical service operators. Air Methods is superbly run, tightly managed, and has been embarked on a continual acquisition.

It's in a continual acquisition mode. It's been buying up its competitors, integrating them into its network, and then streamlining their operations, getting rid of the fat and reaping economies of scale.

Air Methods has been buying all of these smaller EMS operators, absorbing them, integrating them, ringing the fat out, making them lean and mean, and that's why the company has posted consistent EPS growth.

And one of the reasons that's a great business model for the helicopter business is helicopter operation is notoriously expensive. Helicopters are complex machines. Frankly, they break down a lot, they require a lot of maintenance, and helicopter operators tend to, as would airlines, tend to have thin profit margins.

Air Methods has bought up a lot of companies and has absorbed them into a network which it runs very, very efficiently and, as Obamacare expands medical coverage for people, normal people will be able to afford EMS.

Our job is not to debate the virtues or the evils of Obamacare, whether it's good social policy or whether it's socialism, we leave that to the political pundits and the pontificators.

But the fact is, Obamacare will expand medical coverage to more than $32 million Americans who previously didn't have it, so, that means healthcare providers, and Air Methods is, in a sense, a healthcare provider.

Healthcare providers are poised to receive millions of new customers and will be able to expand their operations and see more revenues. Most EMS operators—helicopter operators—are state owned, they're non-profit.

Air Methods is the only one that is publically traded and has consistently grown revenue and profits, and that's why I like this company the best, as a play on EMS growth.

Steve Halpern: Now, let's shift our focus to the offshore drilling area that you talked about earlier, and you're recommending a company called Bristow Group (BRS). Could you tell us about this company?

John Persinos: Yes, Bristow is a pioneer in offshore oil and gas transportation. Bristow, based in the UK, with substantial operations in the North Sea, is in aggressive expansion mode. It's opening up new divisions of where big oil finds are coming to light off the shore of Africa, and in the South China Sea.

Bristow is there expanding its operations and meeting the needs of oil and gas exploration companies that are drilling farther and farther offshore, as the easier oil fields get tapped out. Bristow has been in the game a long time, and, as with Air Methods, it's a well-run efficient operation.

As Air Methods is considered the gold standard in helicopter EMS, Bristow is considered the gold standard in offshore oil and gas helicopter transportation, and I think both companies actually are still undervalued compared to their peers and their growth prospects.

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Steve Halpern: Now finally, we only have a minute, but you do have a third recommendation, which is United Technologies (UTX). How does this large industrial and defense player fit in with this overall theme?

John Persinos: That's a great question. The helicopter business has really consolidated, and there are no more pure plays in helicopter manufacture. Most helicopter manufacturing is, sort of, like, reminiscent of the automobile industry.

It had all these small players decades ago, founded by entrepreneurs who were engineers who wanted to build machines that flew farther and faster, and highest, but then, as the industry matured, these companies were bought up and absorbed by large conglomerates, and one of those, the granddaddy of those, is Sikorsky Aircraft.

Sikorsky Aircraft, founded in 1939 I believe, actually, earlier than that. Anyway, Sikorsky Aircraft was founded by Igor Sikorsky in the 1920s, and Igor Sikorsky flew the first practical helicopter in the 1930s.

Sikorsky is considered the grandfather of the helicopter business and it was eventually purchased by United Technologies, and Sikorsky is the largest manufacturer of helicopters in the world.

It sort of goes back and forth with Boeing for that distinction, but if you want a play on increased demand for helicopters on the manufacturing side, United Technologies is your best bet, because Sikorsky is a contributor of revenue to United Technologies.

Sikorsky's business is booming and Sikorsky makes a host of military and commercial helicopters. Sikorsky makes EMS helicopters, and makes offshore oil and gas transportation helicopters.

The name is synonymous with helicopters, so, as a play on the manufacturing side, Sikorsky is your best bet and Sikorsky is a wholly-owned subsidiary of UTX.

UTX is a good investment regardless, well, for other reasons, because as a global economic recovery gets underway and gains traction around the world, this company's products, this company's industrial products are in increasing demand, so UTX is a good stock, made even better by its helicopter division.

Steve Halpern: Well, that was really a fascinating conversation and a lot of interesting ideas. I would like to thank you for joining us today.

John Persinos: Yes, it was fun. Thank you. Anytime. Bye.

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