- 14,808
https://opco.bluematrix.com/docs/pdf/810c1ecc-b09a-4844-bf74-973926e008fc.pdf
KEY POINTS
Let's be clear: in our opinion, there is no way for eHealth to fully offset lower commissions with increased application volumes. By our calculation, if commissions fall 40%, eHealth would need to add almost 500,000 new members to hold revenue flat. The company has a total of 661,000 individual members today.
eHealth could decide to dramatically reduce its marketing and advertising spend in order to try and maintain margins and EPS, but doing so would officially announce that eHealth is no longer a growth stock, and we think it will be difficult to maintain a 20x P/E multiple in that scenario.
eHealth has had a tough year, falling 17% versus a 6% gain in the S&P, but there is more downside, particularly when the first wave of commission cuts from big health plans start rolling in.
eHealth has had a lot of next big things, like an expansion into the small group market and a China initiative. Neither have really panned out, but the company is hoping that Medicare can save it from the chaos that is coming in the individual distribution world.
Medicare appears attractive, because seniors actually stay enrolled for five years or more, but the cost of acquisition is high in Medicare, and it isn't clear that most seniors are receptive to buying health insurance online.
Even more interesting:
If the company just lets nature take its course, we are looking at three very difficult
earnings years for eHealth in 2011, 2012, and 2013, after the commission cuts take effect
but before any potential benefit from higher volume emerges. There are things that
eHealth could do, although all of them have drawbacks. It could try to figure out a way to
cut its workforce in half and become more efficient, while it could also decide to
significantly reduce the amount of money spent on marketing and advertising. Doing so,
however, would effectively announce to the world that eHealth is no longer a growth
company, and was simply trying to survive, and we think it's tough to sustain a 20x
multiple with that strategy.
What the company appears to be doing is putting a lot of its eggs into the Medicare
basket, and hoping that is enough to save the day. Medicare is an interesting opportunity
for the company, in our opinion, mainly because members tend to stick with their plans for
5-7 years, creating a long-term commission stream. That said, eHealth by talking
Medicare up so much, the market is under the impression that it can be a major
contributor next year, whereas the reality is that the ramp in Medicare is going to be slow,
and really an event for 2012 and beyond. In addition, Medicare acquisition costs are a lot
higher than in the individual business, and we're not sure that management has fully
factored this into its projections.
KEY POINTS
Let's be clear: in our opinion, there is no way for eHealth to fully offset lower commissions with increased application volumes. By our calculation, if commissions fall 40%, eHealth would need to add almost 500,000 new members to hold revenue flat. The company has a total of 661,000 individual members today.
eHealth could decide to dramatically reduce its marketing and advertising spend in order to try and maintain margins and EPS, but doing so would officially announce that eHealth is no longer a growth stock, and we think it will be difficult to maintain a 20x P/E multiple in that scenario.
eHealth has had a tough year, falling 17% versus a 6% gain in the S&P, but there is more downside, particularly when the first wave of commission cuts from big health plans start rolling in.
eHealth has had a lot of next big things, like an expansion into the small group market and a China initiative. Neither have really panned out, but the company is hoping that Medicare can save it from the chaos that is coming in the individual distribution world.
Medicare appears attractive, because seniors actually stay enrolled for five years or more, but the cost of acquisition is high in Medicare, and it isn't clear that most seniors are receptive to buying health insurance online.
Even more interesting:
If the company just lets nature take its course, we are looking at three very difficult
earnings years for eHealth in 2011, 2012, and 2013, after the commission cuts take effect
but before any potential benefit from higher volume emerges. There are things that
eHealth could do, although all of them have drawbacks. It could try to figure out a way to
cut its workforce in half and become more efficient, while it could also decide to
significantly reduce the amount of money spent on marketing and advertising. Doing so,
however, would effectively announce to the world that eHealth is no longer a growth
company, and was simply trying to survive, and we think it's tough to sustain a 20x
multiple with that strategy.
What the company appears to be doing is putting a lot of its eggs into the Medicare
basket, and hoping that is enough to save the day. Medicare is an interesting opportunity
for the company, in our opinion, mainly because members tend to stick with their plans for
5-7 years, creating a long-term commission stream. That said, eHealth by talking
Medicare up so much, the market is under the impression that it can be a major
contributor next year, whereas the reality is that the ramp in Medicare is going to be slow,
and really an event for 2012 and beyond. In addition, Medicare acquisition costs are a lot
higher than in the individual business, and we're not sure that management has fully
factored this into its projections.
