Call me old fashioned if you will, but when making a purchase of any kind, including a stock purchase, I believe value is important. Value, though, is relative, and that is especially true when it comes to stocks. When the market overall is priced as high based on conventional metrics as it is right now, P/Es and the like that don’t fit the conventional view of “cheap” can still be considered value. That is why a stock like eHealth (EHTH), with quite ordinary looking numbers compared to the long-term averages, can still look like a bargain.
Let’s look at those numbers first. EHTH has a trailing P/E of 21.92, which doesn’t look cheap at all when compared to the average P/E of the S&P 500 since inception of around 17. However, when you consider that the current average earnings multiple of the index is around 37, it is certainly value on a relative basis. That value becomes even more obvious when you look at projected earnings, where EHTH has a forward P/E of only around 14.
The problem with looking at just the numbers is that when a stock is out of whack like that, there is usually a good reason. The most common is that you are looking at something in a mature industry where growth is unlikely. That is why stocks in things like conventional energy companies tend to trade at lower multiples of earnings than average, but that isn’t the case with EHTH.
They are an insurance brokerage that specializes in the fast-growing Medicare Advantage (MA) space. In the last quarter, when revenue and earnings were down massively year-on-year for most companies, they posted impressive revenue growth of 35%. Clearly historical growth is not the issue, and a PEG ratio of 0.71 suggests that there are expectations for future growth too, so the obvious question is what is holding back this fast-growing stock with prospects?
The answer is Walmart (WMT).
The retail giant has announced that it is getting into the MA brokerage business and the understandable assumption in the market is that that will severely damage prospects for those already there, like EHTH and their competitors such as GoHealth (GOCO). There are, however, good reasons to doubt that assumption.
As a general rule, even though sojourns into the healthcare field have not been particularly successful for WMT to date, I wouldn’t bet against them on anything these days. If you read Market Musings regularly, you will be aware that I regard Walmart’s CEO, Doug McMillon as one of the best there is, so if anyone can oversee success in a previously unsuccessful area, it is him. The thing is, though, the MA brokerage field is so underpenetrated by online platforms right now -- the 3 market leaders combined account for around 5% of total MA business -- that there is plenty of room for WMT to do well, even as a company like eHealth continues to post good growth.
The historical reason for that ultra-low level of uptake of online services is fairly obvious. The consumers of Medicare Advantage products are, by definition, older people and, not to be too beholden to stereotypes, that has made them less inclined to do anything online. Until now, EHTH has countered that by offering call-center-based dial in options as well, but as time goes on you can expect a natural shift to the higher margin online business.
It is simple demographics that will drive that switch. Those hitting Medicare age these days have probably had 20+ years of work experience with computers, and are going to therefore be quite comfortable making online transactions.
There is also a political risk, I suppose, as healthcare is always subject to the whims of politicians. However, that can only really be assessed on one side, and the potential impact there is pretty positive. Joe Biden has said that if elected he will seek to strengthen the Affordable Care Act, which will do nothing to hurt MA business and will help with eHealth’s other, insurance exchange-based business.
If Trump were to win the ACA would have to be in danger, but so far, no detailed plans for a replacement have been released by Republicans. That makes the promise to undo the current system look more like a politically motivated empty threat than anything actually doable and with Biden having such a massive lead in polls and the betting markets, the political risk looks minimal.
So, in EHTH, you have a company in a fast-growing business, that has already shown that is can be profitable, with decent margins (nearly 18% operating margin over the last year), and prospects for strong future growth, even in the face of a major competitor. Based on that, the P/Es don’t just suggest value, they scream it.
* Disclaimer: The author does not currently have a position in EHTH, but intends to buy the stock for long-term holding within the next few days
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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