eHealth Inc – A Muddy Waters Shorted Share


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Title: eHealth Inc – A Muddy Waters Shorted Share
Company: EHTH -
Share Price Then: 10300p
Author: Ian Smith
Date: Tue 21 Apr 2020
Comments: Normally I don’t look at shares on overseas indexes as the cost of dealing can be quite high and I really have no idea of the market that they operate in.

eHealth have popped up as a Muddy Waters disaster in the making and as MW seem to have been right quite often I have eHealth under scrutiny.

eHealth are a bit like Compare The Market etc for health insurance in the USA. Understanding US health insurance is beyond the scope of this commentary, but for simplicity the market is driven a bit like the UK motor insurance market where the premium is affected by the cover offered and amount of excess the customer is willing to accept.

Cheaper health cover may not cover your doctor/hospital of choice, have lower treatment and drug cost limits, have less out of hospital cover and possibly higher co-funding costs (you pay half and the insurer the other half).

Like motor insurance there is a lot of churn at the bottom end of the market and year one commissions are usually less than the cost of acquisition so customer retention is critical.

Muddy Waters opinion seems to be that eHealth are concentrating on inflating the value of the business by targeting high volume and high churn customers and using accounting tricks to over value these customers.

MW argue that up until about 2017 the company concentrated on customers who would typically renew two to four times, overall this gives a LTV (Life Time Value) of a bit over 4 times the annual premium.

This value has then been applied to the newer customers who in reality are so price conscious that they will go somewhere else at the first or second renewal.

The big however is that the revenue from the renewals that are unlikely to take place are being booked, this is allowed under accounting rules, but those rules were intended for businesses like software companies that licence software that runs someone else’s business, in other words something with a very high likelihood of renewal.

Unlike car insurance in the UK, in most/many cases health insurance applications need human intervention and MW talk about eHealth running a call centre with over 1,500 agents.

There are other suggestions of misrepresentation such as understating the costs of retaining a customer and they highlight the number of shares that the CEO, Scott Flanders, has sold. It may be worth noting that Scott is not one of the company’s founders but has been a director since 2008.

eHealth reported Revenue of $506m, MW adjust this down by $128m for overstating customer life, mostly by 1 year giving revenue of $378m.

The Operating Profit was reported as $81m, MW adjust this down by $128m for overstating customer life and $135 for customer retention costs giving a loss of $181m

What is notable is how much the difference of 1 year between eHealth and MWs retention figures give and I am sure that the retention costs can be argued in many ways.

The MW report resulted in a drop in eHealth's share price by roughly 20% on publication which has now been recovered. With a market cap of $3.2b it does seem as if institutional investors either don’t agree with the MW report or are planning to sell in very small quantities over the next few months to avoid a panic drop.

As a comparison after the MW reports the Burford share price had a drop of roughly 50% which pretty much stuck and NMC also a 50% drop with a short term 25% recovery followed by a further decline.

I can’t see an upside to buying at the moment as the current price is pretty much an all-time high and the MW cost per customer and customer retention arguments seem very strong to me.
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