2 Winners as Local Governments Rebuild

01/26/2012 7:30 am EST

Focus: STOCKS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

The economy may be slowly reviving, but states and local municipalities are still barely getting their footing…and these companies will help them in their recovery, writes Benjamin Shepherd of Personal Finance.

US state and local governments shed about 244,000 jobs in 2011 and 249,000 jobs in 2010, according to government data. Since the height of the global credit crunch in mid-2008, almost 670,000 state and local government jobs have been eliminated.

But as the US economy slowly heals, the outlook for state workers is beginning to improve. The US unemployment rate in December fell to 8.5%—hardly an ideal level, but a marked improvement from the 10.1% unemployment rate recorded in 2009. As Americans get back to work and spend their hard-earned dollars, state budgets are recovering, thanks to rising income tax and sales tax receipts.

Local budgets are likely to remain under pressure in 2012 because local governments depend on property taxes for revenue. It’s true that supply-demand conditions and prices have stabilized in some real estate markets.

But many other areas continue to struggle with high foreclosure rates and declining property values. Tax collections remain below their pre-crisis peak, and are likely to decline again in 2012.

In short, municipal budgets are likely to be squeezed further this year, forcing municipalities to provide the same level of services with limited staff and resources.

NIC (EGOV)
This company works with more than 3,000 federal, state, and local governments to build and maintain Web sites, online services, and payment processing applications.

NIC’s solutions allow governments to boost efficiency and reduce their overhead. For example, NIC enables millions of citizens across the country to purchase hunting and fishing licenses or renew their driver’s licenses online.

Businesses use NIC’s Web sites to file paperwork with local authorities and pay taxes. Interstate trucking companies use NIC’s services to secure the proper licenses to operate across state lines.

NIC employs a transaction-based, self-funded model that allows clients to develop web portals free of charge. NIC bears the initial cost of developing the site in exchange for a long-term contract, and then collects a small fee for each transaction completed via the portal. This novel business model makes NIC’s services cost efficient for its customers. It also saves governments from the protracted and uncertain process of securing funding to build these sites.

NIC’s net margin has historically run in excess of 10%, and has continued to widen as the company develops new services. These offerings can then be implemented in other states at little additional cost. The company has recently secured new contracts in Maryland, Oregon, and Delaware.

The firm’s innovative funding strategy has driven impressive annual revenue growth of 13.8% during the past three years. The Wall Street consensus estimate calls for the company’s 2011 earnings per share to come in at 35 cents, up from 19 cents three years ago.

Providing value to cash-strapped state and local governments, NIC rates a buy under $18. [Shares traded around $12 on Wednesday—Editor.]

Air Methods Corp (AIRM)
This company also stands to benefit from tightening municipal budgets.

A few minutes can make the difference between life and death in the event of a traumatic injury. A patient has a dramatically higher chance of survival if he or she receives treatment within an hour after the initial trauma—a period known to medical professionals as “the golden hour.”

 As a result, many states, localities, and hospital systems operate air ambulances—helicopters and airplanes that transport patients from the scene of an accident to a trauma center. But these aircraft are extremely expensive to operate and maintain, prompting many health care providers to contract air ambulance services from companies such as Air Methods.

The company operates two basic business models: community-based services (CBS) and hospital-based services (HBS). Under the CBS model, Air Methods provides emergency transport and critical care with its own personnel from a base of operation, usually a hospital, fire station, or airport. Under the HBS model, Air Methods operates and maintains the aircraft and the hospital provides the medical personnel.

CBS bases are considerably more lucrative than HBS contracts, and Air Methods added 19 new CBS bases in the third quarter of 2011, eight of which came from new clients. These new bases helped boost third-quarter CBS revenue by 28.7% year over year, compared to an increase of less than 5% for HBS revenue.

Air Methods should be able maintain organic sales growth through acquisitions—the company typically purchases two smaller competitors each year. This strategy has enabled Air Methods to grow revenue by an average of about 12% each year. Earnings have typically increased by 16% annually.

But strong growth in the CBS business should cause earnings to jump by more than 40% in 2012. Buy Air Methods under $88. [The stock went for just under $80 on Wednesday afternoon—Editor.]

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