eHealth: A Healthy Compounder For Every Portfolio (NASDAQ:EHTH)

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Company

eHealth, Inc. (EHTH) provides private health insurance exchange services to individuals, families, and small businesses. The company operates through two segments, Medicare; and Individual, Family and Small Business. The Medicare segment is by far the larger one, and thus, will be the focus of this article. Its ecommerce platforms organize and present health insurance information in various formats that enable individuals, families, and small businesses to research, analyze, compare, and purchase a range of health insurance plans. The company’s Medicare-related health insurance plans include Medicare advantage, Medicare supplement, and Medicare part D prescription drug plans; and ancillary products, including dental, vision, life, and short- and long-term disability insurance plans. It markets health insurance plans through its websites, such as eHealth.com, eHealthInsurance.com, eHealthMedicare.com, Medicare.com, PlanPrescriber.com, and GoMedigap.com, as well as through a network of marketing partners.

What Is MA (Medicare Advantage)?

Medicare is an extremely subsidized government insurance program offered to those over the age of 65. MA is the attempt of government to streamline the process by allowing private insurers to receive the subsidies from the government and compete on customers. Generally speaking, MA is able to offer more attractive plans than traditional Medicare, and so, MA market share as a percentage of the entire Medicare population is growing rapidly.

The pie is also growing rapidly, as the over 65 population is growing due to natural population growth and advances in medicine.

The Biden Medicare at 60 initiative would also be a significant tailwind, if approved, and would grow the pie significantly.

Importantly, Medicare has an annual Open Enrollment Period (OEP) that spans from October 15th to December 7th. This creates extreme seasonality, as most of the revenues are in the 4th quarter.

Industry

The MA (Medicare Advantage) industry is in ultra-high growth mode. EHTH grew revenues 101{d9cf345e272ccae06ddf47bdd1d417e7fd8f81a9d196cc6ace4cb20fad8f4c22} in 2019 and has guided for growth of about 30{d9cf345e272ccae06ddf47bdd1d417e7fd8f81a9d196cc6ace4cb20fad8f4c22} for 2020. The other competitors in the market are SelectQuote (SLQT) and GoHealth (GOCO), both of which also exhibit extremely high growth rates. The business of these companies is to sign on new customers to MA plans. In return, the insurance companies pay a commission for each year that the customer stays with the plan. In the past, this job belonged to face-to-face local brokers, but in recent years, the industry had changed with the rise of the above companies who mostly sign-up customers via phone.

What’s Unique About EHTH?

EHTH signs up most of its customers via telephonic agents. However, what separates it from the competition is that the company invested a lot of capital towards its online capabilities. Competitors’ online offering is inferior to non-existent.

The company recently demoed its tech capability in the following webinar.

Online enrollment has several advantages for eHealth. First, there is no salesperson commission, as no salesperson is involved in the process. Second, the company found that online enrollees are significantly more likely to stick with the plan they choose – there are several reasons, but generally speaking, when they make the decision online, they buy the plan, whereas when an agent is involved, the plan is sold to the customer – this creates a better fit and less churn. This causes online enrollments to have much superior customer LTV (Life Time Value).

In Q3, the company guided to 45-50{d9cf345e272ccae06ddf47bdd1d417e7fd8f81a9d196cc6ace4cb20fad8f4c22} of enrollments to be online-assisted and unassisted combined. This would be a significant jump from the previous OEP.

Accounting

It is worth discussing the revenue recognition of eHealth, as it is quite new. Based on new GAAP aimed to tech companies, eHealth recognizes the customer LTV as revenues at day one. This is even though the LTV assumes some customers will accrue revenues for several years in the future. In order to estimate the LTV, the company needs to make assumptions regarding future churn.

Churn

Churn during the previous OEP (Q4 2019) spiked to 42{d9cf345e272ccae06ddf47bdd1d417e7fd8f81a9d196cc6ace4cb20fad8f4c22}, which means that 42{d9cf345e272ccae06ddf47bdd1d417e7fd8f81a9d196cc6ace4cb20fad8f4c22} of enrollments were no longer customers a year later. This is a terrible statistic, and the share price is suffering due to it. However, this is an eHealth-specific issue and not an industry-wide phenomenon. This is important, as it suggests this is fixable. Growth was extremely high in 2019 as the company focused on conversion of leads and as the result included a couple of deciles of unprofitable growth. Management has taken the following steps to amend the churn dynamics:

  1. Direct TV ads brought in leads that had the propensity to say yes and change their mind later. This year, the company is doing less direct TV and utilizing partner channels better. Partner channels are pharmacies that email their customers with a referral to the eHealth website. As customers enter the website, eHealth already knows which prescription drugs a particular customer uses and knows how to better select a plan for them.
  2. The company utilizes both internal agents and external agents. External agents are not as well trained as internal and cause more churn. During the current OEP, internal agents will process a much higher percentage of calls than in the previous year.
  3. The company’s system now prioritizes leads based on projected LTV rather than projected conversion.
  4. eHealth changed agent incentive payment so that 35{d9cf345e272ccae06ddf47bdd1d417e7fd8f81a9d196cc6ace4cb20fad8f4c22} of its commission is only payable after the 100-day point. A very high percentage of first-year churn happens in the first 90 days post enrollment.
  5. The company built a 200-strong retention team. This team’s job is to call on customers who are likely to churn (based on company’s metrics) and make sure all is well and that the customers are happy with their plans. This is low-hanging fruit, as other companies have been doing this successfully, but eHealth hasn’t been doing this at all, as it was focused on growth rather than profitability. Management previously said that out of all the churned customers, approximately 10{d9cf345e272ccae06ddf47bdd1d417e7fd8f81a9d196cc6ace4cb20fad8f4c22} returns to eHealth, but that happens by mistake as they see an eHealth commercial etc. The new team should be able to improve that number significantly.

It is my strong belief that the above steps will improve churn significantly.

Valuation

eHealth has no debt and $196 million of cash as of 9/30/2020. Sell-side analysts project the company to have a cumulative negative FCF of $170 million until reaching FCF positive at the end of 2022. Thus, no equity offering is expected. eHealth is currently trading at a 23x 2020 P/E. This might seem reasonable, but the company is growing its EPS rapidly. The market is growing with no end in sight, as demographic changes are working to the benefit of eHealth. The sell side projects 2022 EPS of $7. This means you can get this growth company at an 11.5x 2022 P/E. I think a 30x P/E would be more reasonable by that time and set a $210 price target for 2022. Compared to today’s price of $81, this appears to be attractive (160{d9cf345e272ccae06ddf47bdd1d417e7fd8f81a9d196cc6ace4cb20fad8f4c22} return in two years).

Catalyst

During Q1 / Q2 2021, it should become clear whether management’s efforts to reduce churn was successful. It could become obvious even sooner. If they are successful, which I believe they would be, it would serve as an immediate catalyst.

Risks

  • Medicare for all is the largest risk, as it would cancel Medicare Advantage entirely. This would be catastrophic for the stock. In the current political climate, this does not seem to be on the table.
  • If the company takes longer to become FCF positive, it would mean an equity offering and dilution. This does not mean that the thesis failed, but the upside would be more limited.

Disclosure: I am/we are long EHTH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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