eHealth, Inc.: In sickness and in health
The mention of “health insurance” to most Americans most likely sends a deep shiver to their very core; the mere thought of dealing with a system that’s been under the weather for quite some time could cause some to feel sick — not to mention the resulting pain in the wallet.
Enter eHealth, Inc. (Nasdaq: EHTH), a 10-year-old company that’s only been publicly traded for about a year. The Mountain View, Calif.-based company and its ehealthinsurance.com website are helping to change the way consumers and businesses evaluate and buy health coverage.
The easy-to-navigate site offers visitors the data needed to develop a snapshot of what coverage is available in every state and the District of Columbia. This year, eHealth was presented a prestigious Webby Award for having the best insurance website.
eHealth has a firm grasp on its niche of the insurance market, with little competition emerging since it pioneered the online concept. Yet analysts remain fairly blasé about eHealth’s stock, which has seen its price double since a June 12 low point of $17.67. According to a count by Thomson Financial, of seven analysts covering eHealth, two have it at “strong buy,” four labeled it “hold” and one put it at “underperform.”
After going public in October 2006, shares of eHealth had a rapid runup until the overall stock market came down with the subprime mortgage flu last summer.
eHealth created some IPO fireworks and was one of the best initial public offerings of 2006. The stock started trading at $22.50 after being priced at $14, and finished with a 62% first-day bounce at $22.67.
For 2006, eHealth’s revenue totaled $61.3 million, up 47% year over year. Earnings per share came to $0.44, compared with a loss equivalent to $0.09 for 2005.
When its third-quarter results were released on Nov. 1, eHealth’s earnings per share were flat while revenue grew 38% to $23 million. The company also boosted its guidance for the year, triggering a healthy one-day stock-price rise of nearly 16%.
On Nov. 16, shares touched an all-time closing high of $35.99, later scoring an intraday high of $36.89 on Nov. 19, before a virus struck two days later.
The virus was an analyst expressing his opinion that eHealth shares were fairly valued. Analyst Peter Costa of FTN Midwest Securities trimmed his rating on eHealth on Nov. 21 to “neutral” from the “buy” in place since he initiated coverage in June. The stock had crossed his $35 price target; in addition to his downgrade, Costa removed that target.
Costa also wrote that the fourth quarter could produce results weaker than the company expected amid rising costs for marketing and its stock-based compensation program. Shares of eHealth dropped 10%.
In the weeks since then, eHealth has traded around $31, 15% off its peak. It closed at $31.23 on Wednesday.
The reaction was less brutal after Bank of America’s Joseph France initiated coverage on Nov. 30 with a “neutral” rating and a 12-month price target of $35. The eHealth “comparison shopping model offers convenience, speed and search capabilities tailor-made for the growing individual and uninsured markets. Our outlook is positive, but reflected in the stock,” the analyst wrote.
Similarly, Argus Research’s Kevin Calabrese reiterated in September his “hold” rating on eHealth, based on a fair valuation, at a time when shares were trading at about where they currently stand.
Two months later, on Nov. 28, CIBC World Markets analyst Carl McDonald reiterated eHealth as a “sector underperformer” with a meager 12-month to 18-month price target of just $18. The CIBC note said that “we have trouble justifying eHealth’s current valuation, given the major premium it trades at relative to other Internet-focused companies.”
The report also contained concerns about the tight concentration of insurance providers available on the eHealth website, along with expected higher costs. “The company will have to post some major growth in order to exceed what appear to be very aggressive growth assumptions by the market,” McDonald wrote.
For the current quarter, analysts surveyed by Thomson Financial are looking for a slight slip in earnings from its first quarter as a public company, a consensus estimate of $0.13 per share, down from the year-ago $0.15. Revenue is expected to rise some 40% to about $24 million. For the year, EPS is predicted to grow to $0.49 from $0.44, with a 43% revenue increase to $88 million, according to Thomson.
That resembles the company’s updated view, which expects revenue to wind up between $87.2 million and $88 million, and earnings in the range of $0.51 to $0.55. The prior guidance had called for earnings between $0.47 and $0.52, with revenue between $85 million and $87 million.
In 2008, the company has some interesting technology that could come into the mainstream. The eHealth electronic processing initiative — which allows consumers to apply online, transmit an electronic signature and pay, then get instant policy and membership materials back — appears on the verge of coming to fruition.
During the third-quarter conference call with analysts on Nov. 1, President and Chief Executive Gary Lauer said “we now have a major carrier partner that has made the decision to move forward with instant electronic underwriting. … We are targeting implementation of this capability with this carrier for 2008 and believe it will offer another important and very compelling reason to purchase online through eHealth.”
Morgan Stanley analyst Christine Arnold, who has eHealth at “equal weight,” wrote in a Nov. 6 note to clients about the potential of the instant-coverage plans. “We think instantaneous health coverage … expected to launch in 1H08 will be a major milestone next year, and could accelerate top-line gains in 2008.” But the analyst noted that “it is unclear how rapidly this capability will be deployed across major markets.”
On the conference call, Lauer also discussed eHealth’s China push, through the website ubao.com. “Ubao” in Chinese means “best insurance,” and initially the company is offering 25 products from four leading insurers in Xiamen, the Chinese city with a population of two million where eHealth China is headquartered. “At some point in the future, we hope to expand to the entire Fujian province where Xiamen is located, then to other provinces across China … much like the way we grew eHealth in the United States,” Lauer told analysts.
In August, the company announced a partnership with the Foundation for Health Coverage Education to assist the 43 million Americans without coverage to seek out affordable plans. eHealth will refer eligible people to public health insurance programs, and in return, the organization will refer those not qualifying for government-sponsored plans to eHealth for private coverage options.
While most analysts are taking a wait-and-see approach, eHealth is the undisputable top dog in the online health-care marketplace. No competitors have stepped forward to knock eHealth (EHTH) from its throne, and it’s positioning itself with new products and services that could increase its popularity in the years ahead.
