AIR METHODS'

The company picks up more than 80,000 victims of life-threatening injuries each year and carries them by helicopter or plane to the nearest trauma center, often providing medical care along the way. Each flight, as you might imagine, costs thousands of dollars. Around 40% of the patients Air Methods bills have commercial or private health insurance that covers the expense. Another 40% are covered by Medicare or Medicaid, government health plans for the old and poor, respectively. The remaining 20% or so have no health insurance. Air Methods doesn't pause its rescue services to ask about insurance coverage or ability to pay.

Such billing difficulties would seemingly make the air "medevac" business a difficult one for profit-seeking corporations and their shareholders. Indeed, Air Methods is the only pure-play, publicly traded company in its business. But it's not struggling. With a 15% share of the $2.2 billion a year industry, it's more than double the size of its next-largest competitor. Its shares have soared more than fivefold in value in five years. They could have well further to climb. The company turned up recently in our Small-Cap Growth screen.

The "cap" in small cap is short for market capitalization. That's a company's share price times its number of shares outstanding. In other words, it's what it would cost to buy the whole company. Just how small of a cap makes a company a small cap is subjective. We use $1 billion as a cutoff. Companies smaller than that tend to produce better stock performance as a class over long time periods than large companies about two percentage points better each year, studies suggest. There are perhaps two reasons. One is that it's simply easier to grow sales and earning quickly from a small base. The other is that Wall Street analysts tend to overlook small companies for a while before recommending their shares to investors. That can make their shares bargains early on.

Our screen looks for strong sales and earnings growth and promising share price momentum, and it makes sure analysts who already cover the companies it produces have positive recommendations. Use our stock screener and recipe of criteria anytime to run the search for yourself. Recently it produced a list of eight survivors from a starting database of 8,000. Let's look at Air Methods.

Based in Englewood, Colo., Air Methods is expected to bring in $397 million in sales this year, nearly all of it from rescue flights. That's a 15% increase from last year. The company offers two main levels of service: its hospital model and its community model. For its hospital customers the company provides aircraft and pilots, and not much else. Hospitals provide the medical staff and handle the billing, and usually dispatch the aircraft from their premises. Hospital deals typically involve long-term contracts. Air Methods collects a fee from the hospitals, about two-thirds of which is fixed and a third of which varies according to flight volume. For its community business Air Methods handles the whole shebang: flights, medical care, dispatch, billing and so on. Sales are entirely dependent on flight volume.

Hospital contracts provide reliable income, but community business is far more lucrative. It generates around $3.6 million in annual sales per aircraft, vs. just $1 million for hospital business. More than two-thirds of Air Methods' sales come from community services now. Hospitals are increasingly handing more of their medevac services over to specialists like Air Methods in order to focus on their core operations.

Keeping 200 aircraft running isn't cheap; Air Methods' operating expenses eat up more than 90% of its sales. Still, the company managed to generate an 18% return over the past year on the resources it owns. That's better than the broad market's average of 16%. Also, the high costs limit competition; insurance costs alone are prohibitive for start-ups with smaller fleets.

The stock isn't without its risks. Air Methods expenses its maintenance costs as it incurs them, meaning that earnings from quarter to quarter can be volatile. Also, a sharp rise in fuel prices could hurt profits, although the company passes on fuel charges to customers in its hospital business and partly hedges its price exposure for its community contracts. The price seems well worth the risks, though. Air Methods' shares go for 19 times forecasted 2006 earnings, and the company is expected to boost its earnings by 15% a year over the next five years. That gives the stock a PEG ratio (price/earnings ratio divided by earnings growth forecast) of 1.27, suggesting it's about 15% cheaper than the broad market relative to the company's growth prospects. That's a square deal on shares of a small company that's picking up the tab for America's uninsured and still managing to flourish.