Health Insurance Innovations Is Undervalued

While HIIQ has appreciated 41% since September 9th, it is still undervalued.

HIIQ’s revenue guidance indicates 28% growth in 2019, after 40% advance in 2018.

We expect earnings per share to accelerate this year to over $4.

Current share price reflects the impact of a short attack which has subsequently been debunked.  This has created an unusual opportunity.

Investment Thesis

While Health Insurance Innovations (NASDAQ:HIIQ) has appreciated 40% since September 9, 2019, it is still significantly undervalued based on traditional valuation measures. This lead Jim Cramer to ask, “What the heck is that stock doing down there at five-times earnings?” on September 18, 2019 during the Lightning Round of Mad Money.

HIIQ’s revenue growth and earnings growth have been accelerating due to economies of scale and more profitable mix of product offerings topped off with a shareholder buyback program.

Short sellers were attacking the firm which resulted in a decreased share price. The company recently responded with a program to enhance shareholder value.

Business Summary

HIIQ is an online market place brings buyers and sellers of insurance together. HIIQ is the “Amazon” of online insurance sales.

HIIQ is not an insurer and does not underwrite insurance or pay claims. HIIQ distributes for a number of carriers as displayed below

Source:https://www.sec.gov/Archives/edgar/data/1561387/000149315219013110/ex99-1.htm

HIIQ recently re-entered the into the Medicare space. It also has a vision to expand into Spanish speaking markets.

Short Thesis Debunked!

Short sellers play an integral part of the overall market. Yet everyone has a bad call on occasion. This was the case for the call on HIIQ. The questions from several situations including an FTC investigation of Simple Health (HIIQ vendor), customer complaints (about HIIQ vendors), and concerns about robo calling were raised and conflated with HIIQ. Short Sellers went almost silent after the FTC ruling on Simple Health which recognized HIIQ as third party administrator and not a defendant. We are pleased to see HIIQ clearly reiterate answers to these and other questions when mis-perceptions occur. Our understanding is that HIIQ has invested in a strong system of checks and balances to ensure compliance. We believe this to be a smart investment in risk management.

Healthcare Technology Services Sector is heating up

The Healthcare Technology Services sector is seeing increased buyout activity and recommendations from analysts.

Recent acquisitions in the Insuretech space include: Prudential’s purchase of Assurance IQ for $2.3B in September and Centerbirdge acquisition of GoHealth for $1.5B in early August.

Deutsche Bank analyst George Hill initiated coverage on this sector and identified trends which appear to align with HIIQ, including an assessment of the political landscape, growing in Medicare Advantage, increasing choice, and a view that technology is more likely to be an enabler of connecting an aging population with services such as insurance.

Company Value

The Board of HIIQ recognizes that the share price does not properly recognize the value of the firm. In July, the Board initiated a process to enhance shareholder value. The process could result in sale of the firm or other action. Bank of America - Merrill Lynch was retained as a financial advisor for this process.

HIIQ currently trades at 5.2 earnings forecast for 2019. Peers (e.g. EHTH) trade at 28.

Our 12-month target price is $80-90 comprised of two components. First, price-to-earnings of 20x the 2019 estimate. Also price-to-sale ratio that is more representative of a rapidly growing firm in this space based on comparable peers.

Revenues and Earnings Per Share

HIIQ revenue have been growing by $65.9 million in 2017, $100.6 million in 2018 and an estimate of $98.9 to $108.9 million in 2019 per company guidance. This growth is also driving greater growth in earnings.

Risks

There are various risks to consider with any firm. HIIQ is not immune from industry risks.

Risks to this opinion include increasing competition in the insurtech space.

Another risk is regulator changes, while we think (similar to Deutsche Bank) congressional action is unlikely. We believe that executive action would be a challenge without a viable replacement option, which would require congressional action.

Inversely the pressure on rising health care costs will push for innovative solutions which could be a potential opportunity for players in the space, including HIIQ.

Also economic swings which tighten consumer spending would be positively correlated with the success of HIIQ’s affordable offerings. This could also make HIIQ a recession hedge.

Conclusion

The market price of HIIQ is significantly below the valuation price making HIIQ a strong buy recommendation.

I am/we are long HIIQ.

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.