SelectQuote Appears Well Positioned For All-Important Q4

Summary

• SelectQuote went public in May 2020 in an IPO that sold $570 million worth of company shares and selling shareholder stock.
• The firm operates online-centric insurance marketplaces for various types of insurance coverage.
• SLQT is building its business around Medicare Advantage enrollments, so the Q4 period is critical for its outlook.
• I'm optimistic about its preparation efforts for Q4 and I'm Bullish on the stock at around $8.70.
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A Quick Take On SelectQuote

SelectQuote (NYSE:SLQT) went public in May 2020, in a $570 million IPO when the company raised $360 million and selling shareholders sold $210 million of stock.

The firm operates a group of insurance exchanges of home, auto, Medicare and life insurance services.

I'm Bullish on SLQT at around $8.70 due to its apparent operational and marketing positioning for Q4, which is well underway.

Company

Overland Park, Kansas-based SelectQuote was founded to provide insurance companies of many types with leads for consumers interested in purchasing various types of insurance coverage.

The company generates revenue via commissions through first-year and renewal commission agreements with insurance carriers.

Management is headed by Chief Executive Officer Mr. Tim Danker, who has been with the firm since 2012 and was previously founder and CEO of Spring Venture Group, a senior healthcare insurance distribution site.

The company markets its online services via online and offline marketing channels primarily with a direct-to-consumer [DTC] approach.

It's primary channels include television, radio, third-party marketing services and search engine placement.

According to a 2018 market research report by IBISWorld, the market for online insurance brokering in the U.S. is estimated to rise to $18.1 billion by 2024.

This represents a forecast 9.3% from 2019 to 2024.

The main drivers for this expected growth are improvement in online-based lead generation, capitalization and risk management technologies.

Additionally, disposable income growth will also add to consumer demand as will increased awareness of efficiencies to be gained by buyers and sellers operating in an online environment.

SLQT's Recent Performance

Topline revenue by quarter has grown markedly over previous year's results for this seasonal company due to its Medicare business:

Gross profit by quarter has followed the same trajectory:

Operating income by quarter dropped in Q3 2021 due to hiring 'flex agents and accompanying support roles in anticipation of AEP (Annual Enrollment Period) and OEP (Open Enrollment Period)':

Earnings per share (Diluted) have followed the same trajectory as Operating Income:

(Source data for above financial charts)

In the past 12 months, SLQT's stock price has dropped 61.24 percent vs. the U.S. S&P 500 index' rise of 22.6 percent, as the chart below indicates:

(Source)

Valuation Metrics For SLQT

Below is a table of relevant capitalization and valuation figures for the company:

Measure	Amount
Market Capitalization	$1,470,000,000
Enterprise Value	$1,790,000,000
Price / Sales	1.56
Enterprise Value / Sales	1.84
Enterprise Value / EBITDA	11.64
Free Cash Flow [TTM]	$2,450,000
Revenue Growth Rate [TTM]	64.87%
Earnings Per Share	$0.51

Click to enlarge

(Source)

As a reference, a relevant public comparable to SelectQuote would be EverQuote (EVER); shown below is a comparison of their primary valuation metrics:

Metric	EverQuote (EVER)	SelectQuote (SLQT)	Variance
Price / Sales	0.86	1.56	81.4%
Enterprise Value / Sales	0.82	1.84	124.4%
Enterprise Value / EBITDA	-38.19	11.64	-130.5%
Free Cash Flow [TTM]	$14,640,000	$2,450,000	-83.3%
Revenue Growth Rate	27.9%	64.9%	132.3%

Click to enlarge

(Source: Seeking Alpha)

Commentary On SelectQuote

In its last earnings call, covering Q3 2021's results, management highlighted that 70% of its annual revenue production will come in the Q3 and Q4 quarters and said it plans to update its outlook throughout its primarily selling season.

Also, CEO Danker focused analyst attention on the strong enrollment rate in its SelectRx business and said the firm plans to expand that business 'with complementary and additive operations, capacity and infrastructure.'

Danker believes the company is 'very well positioned to pursue growth' throughout its core and Population Health strategies.

Management thinks that filling out its various other capabilities will augment its Medicare Advantage distribution business by being able to cross sell these services.

As to its financial results, in Q3 SLQT grew topline revenue by 45% which was due to an increase in the number of approved Medicare Advantage policies.

Notably, the company spent heavily on its marketing channel expenses as it prepared for Q4's seasonal deluge.

However, management sees increased lapse rates in its health insurance offerings and 'headwinds' in its term life business which is slowed by the COVID pandemic, the rise of the Delta variant in the summer, and now, potentially, from the rise of the omicron variant if that occurs.

Regarding valuation, compared to competitor EverQuote, SLQT has always been higher priced, even when it IPOd. SLQT is growing revenue at a faster rate and appears to be better positioned with its focus around the Medicare Advantage plan operations and related service offerings.

An important risk to the company's outlook is its focus on Medicare Advantage seasonal enrollments and its ability to ramp up hiring flex agents to handle the high volume.

With the current labor market, it appears that there is a higher percentage of verbal offer acceptances by prospective hires that do not follow through to actually begin work. However, the number of people who do start work appear to be more committed and stay longer.

Another headwind the company is facing is lower lifetime value [LTV] from its Medicare Advantage policies, primarily due to lower policy persistency of patients on these policies.

In any event, Q4 is the firm's big quarter and management appears to have a high degree of confidence in its ability to execute during this all-important quarter.

While the firm is exposed in some respects to a resurgent COVID variant season, my estimation of the risk of that is relatively low.

I'm Bullish on SLQT at around $8.70 due to its positioning for Q4, which is well underway.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This report is intended for educational purposes only and is not financial, legal or investment advice. The information referenced or contained herein may change, be in error, become outdated and irrelevant, or removed at any time without notice. You should perform your own research for your particular financial situation before making any decisions. Post-IPO investing carries significant volatility and risk of loss.

Comments

[150emerson]

Well what is really disconcerting is the insider buying was done at much higher levels than stock is now. Either insiders had no idea on how comps were trending, or they simply did not look at numbers themselves. The fact the CEO was a big buyer does not bode well. At best this is dead money for 1-2 yrs and SQ will have to try to tap the capital markets due to extreme negative cash flow the next 2 years. I foresee mergers within the industry as a best case scenario.

[Berserker Bob]

@150emerson Insiders were net SELLERS, big time, at much higher levels because they knew the company was getting it's ass kicked in by the competition.

[150emerson]

@Jonroe Capital yes selling earlier but I’m sure you saw shares purchased from $8-12 before last leg down to $3

[Berserker Bob]

@150emerson but that's just for show. When you sell hiigh for $150mil then buy for pennies, it's for show.

[johnny inca]

toast

[i like stats]

Went long on a small position based on EV/sales, PE and projected growth. Stock went down further so decided to dig in deeper including looking at customer reviews and employee reviews. They have poor customer reviews and seem to have an employee moral problem. I was thinking about buying more but this makes me concerned that the management is a problem. Anybody who worked there or knows someone who can provide any thoughts on management issues?

www.yelp.com/...
www.indeed.com/...

[worldly]

am I reading this right? The company raised $480 million through new stock sales to pay $275 million dividends. Is this a good business practice?

[worldly]

@worldly in 2020

[Berserker Bob]

@worldly not really, these payouts were part of the IPO agreement, one time exceptional "expenses" all known and baked into the cake.

[Berserker Bob]

GoHealth is better in every single metric, objective or otherwise. I'd take SLQT over EHTH for absolute certain, but GOCO owns medicare advantage with no sign of that slowing down. If you buy today, you'll get $1.25 in earnings over the next 13 months on a $3.50 investment. This doesn't even take into account revenue growth. This was a good article, but I implore you to take the same analysis over to GoHealth. I look forward to that article. Best wishes and thanks for the content.

[HardytheTrader]

I agree with your bullish stance and add some additional perspective:
Insider Buying (last six months)
- at $8.75-13.34 range in $SLQT
- at $3.66-4.68 range in $GOCO
- at $22.53-30.27 range in $EHTH
- at $11.73-21.68 range in $EVER

Digital insurance platforms are getting trashed left and right, Quants are Very Bearish... meanwhile the insiders of the industry are unleashing a buying spree like there is no tommorrow. I am Very Bullish for all companies mentioned and will hold my shares until I am disproven

Long $SLQT, $GOCO

[djmv215]

with all due respect to Author, but this Market is so brutal that this stock will tanked to $4.56 or even lower in short term. My analysis says stay away period.

[i like stats]

@djmv215 could you elaborate how do you get a stock price of $4.56 or lower. The space is expected to grow by over 9% and the EV/sales of 1.8 and PE of 18 are expected to drop in half over the next two years. It's hard to imagine the price would drop in half unless they are playing with the numbers.

[divemstrgaw]

@djmv215 Great call - you were spot on!

[Berserker Bob]

@divemstrgaw Yes, god call. What disaster of a quarter. I certainly hope GoHealth took all their business. We will know soon enough. Cheers.