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eHealth LogoIt’s been a rather quiet quarter for eHealth, Inc. (NASDAQ: EHTH), the nation’s leading online source of health insurance for individuals, families and small businesses.

With their upcoming earnings for Q1/2009 set to be released after the market closes on April 28th, we’ll be able to check in on one of the stalwarts of the PeakStocks.com portfolio and a company that is up 35% since I originally recommended purchase last October, and is beating the overall market by 50%.

I previously wrote, after the company reported stellar Q4/08 and full year 2008 earnings, that eHealth was a beacon of light in an otherwise tumultuous market.

The question is, with eHealth’s strength and stock price rise, are shares a little top heavy now? Are analyst’s expectations getting ahead of themselves?

In this post I’ll go over the important aspects that we need to be aware of before eHealth announces earnings and then break them down into the following parameters:

  • What went right in the quarter: What were some of the positive developments that occurred within the company in the last 3 months.
  • What went wrong in the quarter: What were some of the negative developments that occurred within the company in the last 3 months.
  • What I want to see: All things considered, what I realistically want to see from the company as it relates to their business.
  • What we need to see: At the minimum, what we need to see for our investing thesis to still hold and an investment in this company to be prudent.
  • What we’ll probably see: After weighing what’s been going on for the last 3 months, what we can realistically expect when they do announce their earnings.
  • Bottom Line: What it all means, and what you should do.

New to the eHealth story?

eHealth, Inc. (NASDAQ: EHTH) offers Internet-based insurance agency services to individuals, families, and small businesses primarily in the United States. The company’s e-commerce platform, which is accessed directly via ehealth.com and ehealthinsurance.com, enable individuals and families to research, analyze, compare, and purchase health insurance products online.

For anyone that is self-employed, runs a small business, or as more and more companies stop paying for employee health insurance, needs to purchase their own health insurance, it is becoming increasingly crucial that individuals find affordable health insurance and eHealth gives them the power of choice.

eHealth offers various health insurance products, including medical health insurance coverage, such as preferred provider organization; health maintenance organization and indemnity plans; short-term medical insurance; student health insurance; health savings account eligible health insurance plans; and ancillary products, such as dental, vision, and life insurance.

Because of the fixed-cost nature of health insurance (there is no discounting online or otherwise in this highly regulated industry), eHealth is probably one of the only ways that most individuals will ever see what different health insurance offerings they could purchase from up to 180 different companies.

How Is eHealth Holding Up?

Focus will be on outlook, current quarter

eHealth had a an amazing Q4/08 and full year 2008 in spite of the fact that unemployment was on the rise, and the economy went absolutely into the tank in the latter half of 2008 affecting almost every other business in the world.

But, as I had projected when I initially purchased shares, eHealth was able to remain stout in spite of what was happening around the company, and in fact made an aggressive push because of it, to market their offerings and increase market share.

It was a bold strategy that absolutely paid off.

Analysts are expecting the company to earn $.12 per share ($.14 is the high estimate), on revenue of $31.45 million ($32.12 million high estimate).

Let’s take a look at what has transpired since the last earnings call.

What Went Right In the Quarter

eHealth chugging along

eHealth is a quiet company.

I like that.

No drama, no weirdness, no strange acquisitions, no “restatements”, no mid quarter “updates” or earnings revisions, and nothing earth shattering.

There’s something to be said for that.

eHealth simply continues to execute, and in fact, looking back over the last couple of years, eHealth has always managed guidance beautifully, and in fact, only lowered expectations 1 time, as they were blindsided by the collapse in the overall economy.

That was early in 2008.

They haven’t touched their numbers since, and in fact have slightly raised guidance and have matched or beaten estimates every single time they have reported as a public company over the last 9 quarters.

Adding color to that, eHealth has matched earnings 2 times, and beaten 7 times, anywhere from $.01-.05 per share in EPS.

During this quarter, eHealth was again quiet for the most part, aside from a few small nuggets of information/deals:

  • Partnership with Health Benefits Direct: eHealth announced a deal whereby they would acquire new and existing customers through Health Benefits Direct’s website, as well as current relationships. This was a small deal, that eHealth said would be accretive to earnings right away. You can read more about it by clicking here.
  • Inclusion into the S&P SmallCap 600 Index: eHealth replaced Champion Enterprises Inc. (NYSE: CHB), in the S&P SmallCap 600 index, which gave shares a nice pop on March 12th as institutions and index funds had to account for the re-balancing of the index. You can read more about the index swap by clicking here.
  • Continued educational mission: eHealth continued to be on the forefront of health insurance information concerning costs, savings, tax plans and benefits surrounding health insurance, and about COBRA and how most people, even with subsidies, can save more money by paying for another provider out of pocket, than paying the difference between their old coverage and what the government will subsidize.

Overall, it was a nice productive quarter for eHealth.

What Went Wrong in the Quarter

Shhh….

I tried hard to find something that went wrong in the quarter for eHealth…I really did.

The simple truth of the matter is that if eHealth was able to thrive and grow their business in the double digits while things were tumbling out of control, then now that things are being perceived to be improving, the company is bound to benefit even more as the economy gets stronger.

It seems as if the market agreed with me sending eHealth’s shares up way more than the overall market, and making it the biggest gainer in my portfolio.

The only possible negative, and I’ve talked about this before, is the fact that customer acquisition costs were on the rise and eHealth was purposefully spending more and more money on those acquisitions as they saw an opportunity to increase their business and market share in a time when many are out of work, and looking to cut costs any way they can while retaining the benefits of health insurance.

What I want to see

Keep up the good work

Just keep doing what you’ve been doing Gary (Lauer that is, the CEO).

There’s a reason the market is placing a premium on shares of eHealth, it’s because they are executing, and are one of the few companies showing nice growth, tons of profit, and free cash flow generation in these rough economic times.

I’m not being greedy here.

All I want to see is for things to continue nice and steady with a good outlook and business trends.

What We Need To See

Meet or beat expectations

For the market to continue to bestow a premium valuation on shares of eHealth, the company must continue to do what it has been doing.

We need to hear and see that things are steady and not deteriorating at all.

I don’t think that we need to hear any upward revisions, and in fact I think it’s wise and prudent for management to keep things on the expectations side low.

What We’ll Probably See

Steady as she goes

Looking at eHealth’s track record of always matching or beating estimates, I don’t foresee a problem in that arena.

I think eHealth matches or slightly beats estimates (they may have taken some of the extra earnings in the quarter and put them towards advertising as they said they would), but don’t look for eHealth to crush estimates, just gently touch the high end, and slightly exceed them.

Bottom Line

Shares a little pricey, but you get what you pay for

As I already talked about, eHealth caught my attention late last year when I heard the CEO present at an investor conference.

I had always liked the company’s business model, but never invested because valuation was always too rich.

That valuation finally came down to a reasonable level, and instead of being a value trap like other names, eHealth remained true to its downward revisions, stuck with them, and beat them to truly present itself as a great company at a good price.

Nothing has changed in that time frame, aside from the company’s shares rocketing up the charts way ahead of the market’s pace.

While at the top end of my buy range, I still think that a premium valuation on eHealth is warranted, and that the chart and fundamentals look very strong here.

I think a purchase on a pull back would be wise for at least a 1/4 position of your portfolio, and look to possibly unload shares if the fundamentals deteriorate, or the stock races too far ahead of those fundamentals.

Stay tuned, as I’ll be watching this one very closely over the next few months for a possible exit strategy if that happens, but until then, eHealth remains one of my most solid plays out there in an uncertain market and earnings environment for many other companies.

  • Start: with my initial company write-up here.
  • OR: read my latest company analysis and quarterly earnings breakdown here.
Source: eHealth: Steady as She Goes