Bottom Line

eHealth still worth owning, despite lofty share price

As I talked about in my earnings preview, eHealth’s shares are not “cheap” by many measures, including using a discounted cash flow model.

Metrics such as P/E ratios, P/S ratios, and P/CF and P/FCF ratios show eHealth trading at a fair price, or slightly above that.

All that being said, I continue to advocate purchasing shares of eHealth on any weakness at all, and now that we know that the company themselves purchased their own stock around $12.70 per share, that should serve as a bottom baseline when looking at the perceived valuation of eHealth relative to its growth prospects in a beaten down market and economy.

If fundamentals were deteriorating (true that eHealth’s growth rate used to be much higher than it is now), then I would be worried.

But remember this: as a company grows, year over year comparisons for growth rates become harder and harder to achieve, so a nice sustainable 20% which was eHealth’s long term goal for a long time, now looks sustainable, and makes for a solid company.

If we look at all the metrics that matter to eHealth, things like customer acquisition costs, submitted applications growth, member growth, revenue per customer growth, earnings growth, revenue growth, etc., we see that not only are things not deteriorating, but they are actually improving when most companies in the market are lucky to be treading water.

Couple that with eHealth’s hefty balance sheet ($150 million in cash, no debt, about $6 per share in cash), and you can see why analyst’s and Wall Street have bestowed upon the company a best in breed status and valuation to boot.

eHealth is a long term growth story with amazing margins, cash flow production, and execution by a competent and talented management team that has not lead investors astray, save for a tumbling economy that caught everyone off guard early last year.

If we also take into account that reform is on its way in the U.S. legislature when it comes to health insurance, you can rest assured that there are many catalysts in the future that might make eHealth look “cheap” in retrospect.

For instance, what if every person in the U.S. were required to obtain health insurance like they were car insurance?

eHealth boasts 680,000 paying members right now…how would that number expand if that came to pass?

Take it a couple of notches lower and say for instance that a state like California, or New York went along and passed bills to require its residents to obtain health insurance.

How would that look?

There are 37 million people in California, and 19.5 million in New York.

What if just 1%, yep, just 1% of Californians made their way online and used eHealth to find the required health insurance coverage?

That would add 370,000 paying members to eHealth’s roster of 680,000 members, or a 46% increase!

What would that do for eHealth’s earnings, revenue, cash flow, etc? Yea, through the roof almost overnight.

Now, I did oversimplify things here because obviously many people already have health insurance, some would never be able to afford their own, etc., but I think the point is clear.

Bottom line: eHealth is a great company that is executing regardless of external governmental forces that could push things to an entirely different level.

Even if you assume nothing changes for the foreseeable future in terms of mandates and universal health coverage for individuals and families, eHealth is still rocking the house with their current growth and execution with the addressable market that is available to them, with tons of runway still left.

The bottom line is this: eHealth is a great company at a fair price. Buy on dips, hold for the long term.

• Start: with my initial company write-up here.
• OR: read my latest company analysis and earnings preview here.

–> Get updates you WON’T find on PeakStocks.com by following me on Twitter. Click Here.

*As of 4-28-09. Except share price, all values in millions.

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