EHTH: eHealth

[rpadebet]

This stock jumped 28% to $30 stock (600 mill mcap) today because it recently signed a Web broker entity agreement with the federal Govt. The agreement allows the business to market and sell health insurance via its website as an alternative to Federal or state exchanges which are going to be setup soon. They make their money via commissions (% of health insurance premiums) they sell via their website/exchange.

 

This is not a typical value stock, but nonetheless I was curious and did some preliminary research on it today. It caught my attention mainly because of the possibility of "moat" surrounding it. It definitely has the first mover advantage and there is no telling how many such entities the Govt decides to license to sell health insurance in future, but it is clear that if they are able to attract a significant proportion of the populace to buy through their website then they have a good business with recurring revenue stream.

 

Right now, before the implementation of ACA exchanges, they have about 1million subscribers on their website who buy individual/family and medicare insurance through them. Medicare is the most growing part of their business. Their revenues from all these subscribers are tracking $180 mill on an annual basis i.e. they make approximately $180 per subscriber annually. As per the company's own admission in their annual report, they make a higher commission the first time someone buys via their website and lesser commission from renewal each year. They are paid not by the subscribers but by the insurers themselves (as a rebate) so subscribers have no price incentive to shop elsewhere.

 

Their balance sheet has approximately 150 mill of Equity. Approximately $100 mill of it is cash, which they, in their short history, have used to buy back stock.

 

Their Enterprise Value according to my calculation is about $500 million (using today's closing prices fro mcap and netting out the cash). EBITDA is about $25mill according to the company presentation, but I feel its a bit meaningless at this point as their Costs are still a significant % of their revenues. Any new Technology/Customer Care spend creates a lot of volatility in this EBITDA number. As they have an agency model, once they have enough subscribers, EBITDA could be a good metric to use as they need very little fixed investments to incrementally grow their business. The major portion of their current expenses are from Customer Acquisition costs or Advertising costs they pay Yahoo/Bing/Google etc. It is about 35% of their revenues.

 

As per the company, their potential opportunity set is about 150 million people (Medicare, small business, individual/family and uninsured combined).Starting next year 50 million of these uninsured people will be forced to buy health insurance via an exchange. Most of these are young people who we might guess would prefer buying health insurance online and opt for a streamlined/easy interface being offered by this company. The risk here is the Federal govt and states might come up with a much more easier to use web interface, but I personally wouldn't put much stock in it.

 

In my opinion, first mover advantage is key here. These guys have been running this website for sometime now and clearly have the technological advantage. Part of the moat also comes from the fact that once someone subscribes via a particular route, they are most likely not going to choose a new route next year because of 1. This is going to be a once in a year thing 2. changing exchanges would potentially involve documentation to prove history of health coverage etc. 3. No clear monetary advantage of changing the exchange when the provider plans are priced the same. So if these guys get new customers this enrollment period, most likely they will hold onto them long term.

 

New private competition might come in later, but they have to go through the hurdles of getting these licenses from the Feds, getting name recognition and providing people with a justifiable reason to switch exchanges.

 

The interesting part about this company is that there is almost no incremental cost involved in taking on new customers. It should scale up pretty well. Granted that some of their variable costs like Ad spending/Customer service/ Technology improvements could increase, but I don't think they could increase at the same rate the revenue from customers increases.

 

Assuming they are able to get 10% of the uninsured base (50 mill) to sign up via them i.e. 5 million new subscribers, they have potentially a business generating revenues of 1 bill dollars annually. Assuming a steady state operating margin of 50%, this could be a 500 mill a year cash generating business. Even after the price spike today, the entire business is selling for 500 mill.

 

I completely submit that this is a speculative play at this point, but compared to some of the other websites which are being valued near 100 billion, I feel this one has govt enforced moat, provides a necessary service, is valued relatively sensibly even now and their competition (i.e. Govt) is not that threatening in terms of customer service. Even in the most optimistic scenario I wouldn't value it close to 100 bill, but I do think it has a fair potential to be valued at a multiple to the 500 mill valuation it currently has.

 

I don't have a position in this stock yet, but was curious to know what other posters on the board think of this.

 

 

 

eHealth_Investor_Presentation_May_2013_1.pdf

[heth247]

Anybody follow this stock? Today's drop might be a good entry point although the capital raise and revenue forecast is disappointing.

[aglittell]

I own it (unfortunately). The cloud hanging over the stock was uncertainty surrounding the elevated attrition rates that were depressing the LTVs on the commissions the company receives. With this pre-release it seems that there are other operational issues that have entered the picture. Membership growth decelerated massively and expenses appear to be way up. It is tough to get more granular than that without mgmt commentary. But I am not surprised that the stock has sold off like it has. This very likely could trade sideways for another year as the majority of the company's earnings come from the Medicare Open Enrollment Period. Mgmt will likely lay out the specifics on the call and we will need to wait another year to see if their operational adjustments pay off.

 

I view the financing from HIG as a positive. Yes it will be dilutive but HIG doesn't get out of bed for an 8% preferred return. Those will convert and they convert between $50 - $90. HIG needs a 25% IRR and a MOIC of 2 - 2.5x to make this worthwhile for them and a $225mm equity check isn't tiny. My bear case for this company was a take-private, with HIG involved this appears to be more likely.

[irnovo]

I am shareholder too. The prelim results were indeed depressing. I ended up buying a bit more to bring my cost basis to $64 because I took the capital raise and the terms as sort of positive news. I'm perfectly willing to wait until the next AEP cycle and still believe that there is lot of upside. Hoping that the earnings call would provide further downside protection. Still cant believe how they can mess up so big. Long term, I am bullish mostly because of their online growth and commitment to increase internal agents.

[banellie]

I think Muddy Waters has been after this company, plus I think GOCO and SLQT are better companies to invest in than EHTH.  Specifically, I think GOCO does the best job in the Medicare Advantage market, at least judging by its numbers, but Select Quote sells more than just Medicare plans.  If anyone has a moat, it is likely GOCO since they have the best metrics if I remember right, but personally, I don't think anyone has much of a moat in this market. 

[aglittell]

With the tailwinds of enrollment growth and the relative small piece of the pie that these players have, I would argue a moat in the current competitive landscape isn't all that important. Although the results announced last week may have changed my thinking on that. If CAC is up w/ enrollment down, it is possible that those tailwinds aren't as strong as I expected. Longer-term I expect EHTH to have the strongest moat with the presence of their online platform. MA members can store their health data on EHTH's site to facilitate the sign-up process online. Signups in the online vertical have much lower attrition rates and EHTH is the only company that has invested in its tech. Online was 43% of signups this AEP cycle while competitors will be starting from 0 when they inevitably decide to invest in tech. Do we really expect the majority of MA enrollments to occur on the phone or from door-to-door agents in 5-10 years? My dad is about to turn 65 - there is no shot he would sign up for insurance anywhere other than the internet. If EHTH can figure out their operational hiccups in the short-term, shareholders should do well from here. If the company becomes the online marketplace for MA then this will be a homerun.

[Spekulatius]

I think Muddy Waters has been after this company, plus I think GOCO and SLQT are better companies to invest in than EHTH.  Specifically, I think GOCO does the best job in the Medicare Advantage market, at least judging by its numbers, but Select Quote sells more than just Medicare plans.  If anyone has a moat, it is likely GOCO since they have the best metrics if I remember right, but personally, I don't think anyone has much of a moat in this market.

 

Interesting post. What numbers exactly are you looking at when comparing GOCO with SLQT? Customer acquisition cost / lifetime value etc?