The Picture of Health: Cash at Medical Midcaps

Compared with four other industries – the machinery, software, internet, and semiconductor sectors – health-care companies in the CFO Midcap 1500 produced the highest 2009 first-quarter cash earnings per share.

Editor’s note: To download a Microsoft Excel file containing the full results of the CFO Midcap 1500 Healthcare Industry Scorecard,

click here.

The best decision CFOs working for midcap companies in the health-care industry can make if they want to provide shareholders with bundles of cash is, well, to be working for midcaps in the health-care industry.

That’s because the operations of medium-sized health-care products and services companies make remarkably steady amounts of cash available to investors in their stock each year. To be sure, health care has a seasonal aspect — think of those New Year’s resolutions to diet and join health clubs and how many of those vows are broken in a few months. Mostly, however, the industry enjoys a consistent stream of customers because people get sick and are hurt in accidents all year round. Other factors, including its tendency not to get too deeply in debt and its paucity of price competition, add to the industry’s inherent ability to produce cash.

Take Air Methods Corp., a company that flies patients via helicopters to get treatment at the right health-care facilities. For the first quarter of this year, the company recorded $1.32 in cash earnings per share, the most of any in a group of 41 health-care companies culled from the CFO Midcap 1500 index. The index, created by CFO and based on publicly reported data provided by Capital IQ, consists of publicly traded companies with 2009 first quarters ending March 31 that have yearly revenues of between $100 million and $1 billion. The companies are ranked according to cash EPS, which is calculated by dividing a company’s operating cash flow by its diluted shares outstanding.

Fueled by a 6% rise in revenues, Air Methods boosted its cash EPS by 62% in the first quarter of this year relative to the first quarter of 2008. Asked what the company had done to kick out so much more cash to its shareholders, Trent Carman, the company’s CFO, secretary, and treasurer, told that it would be a mistake to say it was any management actions that boosted operating cash flow. “It’s the business,” he explained. “It’s a heavy cash-flow business all by itself.”

In that respect, Air Methods is typical of how well health-care midcaps stack up against companies in other kinds of business. Compared with four other industries — the machinery, software, internet, and semiconductor sectors — health care produced the highest 2009 first-quarter cash EPS, 32 cents.

That’s a 30% rise over the first quarter of 2008 — and testimony to the industry’s ability to produce cash even during the worst of times. Indeed, health-care midcaps saw their aggregate revenue jump from $3.70 billion in the first quarter of 2008 to $3.98 billion in the same quarter of this year.

How have these companies managed to hold their own so well? One reason is that they’re “more likely to have pricing power and therefore improved margins,” said John Sullivan, director of research at Leerink Swann, an investment bank focusing on health-care companies. The reason is circular: because they often must hatch innovative products and business models to compete, health-care midcaps are less likely to face direct competitors than companies in other fields might. Thus, they have more control over what to charge customers, according to Sullivan.


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