|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||343||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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Ehealth (“EHTH”) is a great business for sale at a great price.
What do they do?
The Company operates a health insurance comparison shopping engine under the URLs www.ehealth.com and www.ehealthinsurance.com that is targeted primarily towards purchasers of individual and family health insurance plans. EHTH acts as a broker in these transactions, selling health insurance plans offered by all of the major managed care companies. The target market for EHTH is the 18 million people covered under individual and family plans (“IFPs”), the 47 million uninsured and to a much lesser extent through small business offerings the 51 million people covered by their small business employer. The business model is the same as any other broker of health insurance: compensation to EHTH is 25% of the premium in year 1 and 15% of the premium thereafter. The Company currently has 488,300 IFP members, representing a tiny portion of the addressable market. The basic service the Company provides is a faster, easier way to purchase health insurance: the comparison shopping engine allows customers to very easily compare premiums and other key terms of various health plans and then streamlines the purchasing process. The traditional purchasing process would involve comparing health plans on your own by contacting the managed care companies directly or by buying through a traditional broker. This purchase process is extremely unpleasant for the customer because it is cumbersome to collect the relevant information to compare plans and then the manual process of applying for health care and getting approved is slow and laborious. Further, brokers are incented to sell you the highest premium plans in order to maximize their compensation. EHTH simplifies the process by collecting all of the relevant information for you, presenting it in an efficent manner and then streamlining the application process. Because the purchasing process is so much easier with EHTH, the Company believes that it can expand the market for IFPs from the current 18mm market size to at least some portion of the 47 million uninsured, who have the economic resources but are turned off by the byzantine process of purchasing health insurance. EHTH believes that the standard process of getting approved for health insurance takes about 50 days from start to finish. EHTH reduced this process down to 17 days through its online application process and beginning in Q1 2008, the company launched an instant approval process whereby a customer can literally be approved and receive health insurance coverage instantly online. Only a small portion of the health plans currently have the instant approval feature, but this is growing rapidly which will be a nice catalyst for accelerating submitted applications and conversion rates.
Why is this an attractive business?
I won’t bore you with a DCF model, the valuation metrics here I think are pretty obvious. The market cap is $340mm, no debt and $140mm of cash gets you to an enterprise value of $200mm. The business will do $25-28mm of EBITDA this year, so about 8x EBITDA and will also generate about the same in free cash flow because of no cash taxes, minimal capex and interest income. So, you have an unlevered FCF yield north of 10% for what I consider to be an excellent business that will grow (debatable at what rate, but lets just say >10%). Yes, that’s based on no taxes which obviously will not last forever, but the business is growing so the cash flow is going in one direction, up. DCF and comps not necessary, this is common sense cheap.
Why is it cheap?
I think its important to understand the bear case, so I’ll offer up a few theories on why the stock has capitulated to these sub IPO levels:
The biggest risk factor in this business is changes in the regulatory landscape. I don’t think this is a good venue or I’m necessarily qualified to write an intelligent treatise on the myriad of potential regulatory developments, which would impact all of the players in health insurance in addition to EHTH. You can read any of the many initiation of coverage reports or listen to an EHTH investor conference for an update on the regulatory landscape as it relates to the Company and which presidential candidate might impact the business more favorably (I bet you can guess which candidate is more favorable for this business, like a lot of businesses out there). Anyhow, I don’t pretend to maintain any unique insight on how regulatory processes might play out. My take on all of the regulatory discussion is there are tons of different proposals, some of them are positive with respect to EHTH and some are negative. The pace of change is very slow and it has been proven time and again that it is difficult to implement any kind of health care reform both at the state and federal levels. The most likely scenario is the status quo.
Hope you enjoyed the writeup and I look forward to your questions and discussion….
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