EHTH: Not Out of the Woods Yet (2Q14)

Takeaway: EHTH cut guidance following a disastrous quarter. We're largely out of catalysts for 2014, but 2015 doesn't get any easier.

KEY POINTS

  1. 2014 RISK ALL ON THE TABLE NOW: Individual and Family Plan (IFP) net membership declined by 49K: EHTH gained 95K new members, while losing 144K existing members (18% of its members from the quarter prior).  While many believed EHTH was working with a massive tailwind from the individual mandate under ACA, we estimate that EHTH saw declining IFP revenues in 2Q14 on a y/y basis.  Turns out the public exchanges posed a much bigger threat than either the street or management believed they would be.  The company's updated guidance range suggests that management is only expecting ~1/3 of its previous growth outlook.
  2. BUT NOT OUT OF THE WOODS YET: Attrition risk will remain into 2015 as pre-ACA plans expire, and MCOs cancel those plans on their own to manage the overall risk profile of their books.  We have suggested that one of the bigger risks heading into 2015 is that MCOs cut commission rates next year now that the public exchanges are largely operational.  Further, when (if) EHTH gets the ability to sell subsidized plans, it must offer all subsidized plans that are available on the public exchanges, regardless of whether it has a commission agreement with that MCO or not.  In a worst case scenario, EHTH could sell an MCO's plan on its platform, and not receive any commission for it.  Under these circumstances, is there a compelling reason to believe that commission rates won't get cut next year?
  3. MULLING THE SHORT: All the major risks to 2014 are on the table now, so we're largely out of catalysts on the short side for the near future.  However, 2015 is around the corner, and as we highlighted above, EHTH is not out of the woods yet.  Remember, EHTH is essentially a distributor without a captive consumer.  It operates in a crowded industry with a growing competitive threat from the public exchanges.  MCOs are likely to push back on rates in 2015; and there's not much EHTH can do about it.  For now, we remain short.  

EHTH: Not Out of the Woods Yet (2Q14) - EHTH   Net Membership Growth 2Q14

 

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