Ehealth is Preparing for the Profitability Exam

I would hold Ehealth (EHTH) despite the disappointing price development.

Due to the underperformance of conventional segments, corporate earnings have been negative in recent quarters, with the stock losing more than 80% in the past year.

Things did not go well for shareholders of Ehealth. The near future doesn’t look any better either, as the company is expected to report another loss this year.

Moreover, the current environment is far from easy, given high inflation, geopolitical tensions and the risk of a recession fueling extreme uncertainty.

Meanwhile, Ehealth is in the midst of a business transformation aimed at increasing the profitability of its online platform. If successful, this should contribute to better times for the stock price once macroeconomic drags are less heavy.

About Ehealth

Ehealth, Inc. operates eHealth.com and eHealthMedicare.com, two online health insurance marketplaces that provide consumers with health insurance enrollment solutions from more than 200 health insurers in the United States.

Individuals, families and small businesses can choose from a variety of health insurance plans.

Ehealth’s headquarters are located in Santa Clara, California.

Business Transition

The company aims to return to profitable growth, not without executing significant cost-cutting activities. By phasing out more inefficient operations, it aims to achieve savings of about $60 million this year.

Specifically, the company’s strategy is to slow down traditional telephonic enrollment and focus on online business growth to gain market share.

With a reorganized business that will focus mostly on online activities, the company hopes to be better positioned to benefit from the expected growth in the U.S. healthcare and medical insurance market.

Mordor Intelligence estimates that the size of the U.S. healthcare and medical insurance market will grow at an annual rate of 8%, over the next few years through 2027. This is to be driven by high-deductible healthcare plans that are gaining popularity with the public.

On TipRanks, EHTH scores a 1 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to underperform the broader market.

Financial Results for the First Quarter of 2022

In the first quarter of 2022, revenues came in at $105.3 million, a 22% year-over-year decline due to the impact of certain corporate initiatives to improve enrollment quality. The company beat analysts’ median forecast for first quarter 2022 revenue by $4.74 million.

By segment, Medicare declined 21.45% year-over-year to $95.07 million, while Individuals, Families, and Small Businesses declined 22.82% year over year to $10.18 million. Medicare accounted for 90.3% of total revenue, while Individuals, Families, and Small Businesses made up the remaining 9.7%.

In the first quarter of 2022, the company reported a pro forma net loss of $0.91 per share, while in the same quarter of 2021 it reported a pro forma net income of $0.36 per share. Analysts predicted a larger net loss of about $1.19 per share.

Adjusted EBITDA also declined year-over-year, as it was a loss of $24.83 million in the first quarter of 2022 versus a positive result of $17.31 million in the first quarter of 2021.

In addition, the company generated $47.11 million in operating cash flow for the first quarter of 2022, compared to $42.81 million for the first quarter of 2021.

Guidance

Looking ahead to 2022, the company expects total revenues between $448 million and $470 million, compared to analysts’ average forecast of $459.73 million.

The company also expects GAAP net loss to be between $106 million and $83 million and expects adjusted EBITDA to be a loss between $64 million and $37 million.

Total cash outflow estimates integrate the company’s 2022 guidance and are expected to range from $140 million to a maximum of $120 million.

The Financial Condition

As of March 31, 2022, the balance sheet showed cash on hand of $231.5 million, which was much more than the total debt of $105.05 million. The total debt included long-term debt and current and long-term lease obligations.

That means the company must have enough cash to support its operational needs for a few years to come. However, as the Altman Z-Score below shows, the financial position needs to be strengthened.

Ehealth has an Altman Z-score of 1.41 indicating distress zones. This means that the company could go bankrupt within the next two years.

For those who may not know, the Altman Z-Score indicates the likelihood of a company going out of business.

A value less than or equal to 1.8 indicates that a company is in the distress zone, so the probability of bankruptcy is extremely high.

Wall Street’s Take

In the past three months, eight Wall Street analysts have issued a 12-month price target for EHTH. The stock has a Hold consensus rating based on zero Buys, eight Holds, and zero Sell ratings.

The average Ehealth price target is $12.71, implying a 22.68% upside potential.

Valuation

Shares are changing hands at $10.98 as of the writing of this article for a market cap of $194.66 million and a 52-week range of $7.89 to $66.47.

After falling more than 80% over the past year, the stock price is 2.25 times below the 200-day moving average of $24.70. Currently, the share price represents a significant discount from last year’s level, but there are no guarantees for shareholders that they will not suffer further losses.

While waiting for the business shift to bear fruit, continued turbulence in the market could push the stock further down.

Conclusion

Due to several quarters of negative earnings, the stock price has performed poorly over the past year. The company is undergoing a business transition which it expects will boost its operations from a profitability standpoint. The company’s future growth opportunities depend on the success of this business transition. The action plan seems interesting and is in line with the development of the market. It’s could be worth continuing to hold the stock.

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