EHTH: Thoughts into the Print (2Q14)

Takeaway: Bad news is mostly on the table, but we're expecting a guidance cut on the release. Stock has taken a beating, so downside may be limited.

KEY POINTS

  1. MOST OF THE BAD NEWS ON THE TABLE: Many of the headwinds we were expecting for 2014 are already on the table.  Attrition all but negated the 1Q14 surge in Individual & Family Plan (IFP) new membership growth.  Additionally, management suggested that application volumes will be down y/y from 2Q14-3Q14.  EHTH is down over ~40% since we initiated the short position, and we are running out of near-term catalysts, so we will be evaluating the position after the print.
  2. LINGERING 2014 RISK: The lingering tailwind that EHTH has going for them in 2014 is the flow-through of late 1Q13 applications before the Open Enrollment deadline.  However, the deadline could prove to be a headwind as well.  EHTH may have lost additional members who were looking for subsidized plans on the Government Exchanges (EHTH had limited ability to sell those plans in 2014).  For perspective, HCA Holdings, which is the largest hospital system in the US, said yesterday during its earnings call that only 40% of its Exchange patient volumes are coming from the newly-insured.  That means 60% already had insurance, some if not, most of that is coming from private exchanges (e.g. ehealthinsurance.com).  The quarter and guidance could go either way, but we suspect a guidance cut is the most likely scenario.  
  3. MAJOR RISK IN 2015: What no one on the sell-side is talking about is Individual & Family Plan (IFP) commission rates next year.  The private exchanges (e.g. EHTH) are becoming more obsolete now the government exchanges are operational, which wasn’t the case heading into the 2014 Open Enrollment period.  The mix of new lives on the exchanges in 2014 are older (costlier) than historical experience, meaning Managed Care Companies (MCOs) need to find ways to recoup profitability next year.  Of all options available to MCOs, cutting IFP commission rates will be the path of least resistance.

Let us know, if you have any questions, or would like to discuss further. 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more