SLQT - SelectQuote: Insider Buying But A Significant Debt Load

2023-11-13 10:40:33 ET

Summary

• SelectQuote, Inc. is a small cap online insurance broker with a stock that has had a huge decline since coming public in early 2020.
• However, the company has made some progress in reducing costs and the shares saw some significant insider purchases in May and September of this year.
• Time to buy into this improving story?  An analysis follows in the paragraphs below.

Insurance is like a life jacket. It’s a bit of a nuisance when you don’t need it, but when you do need it, you’re more than thankful to have it .” ? Unknown.

Today, we put SelectQuote, Inc. ( SLQT ) in the spotlight. As you can see below, the stock of this online insurance broker is deep, deep in 'Busted IPO' territory. The company reported its latest quarterly results earlier this month and has seen some decent-sized insider purchases in recent months. Signs that management is finally righting the ship? An analysis follows below.

Company Overview:

This small cap company is headquartered just outside of Kansas City in Overland Park, KS. SelectQuote provides and operates a technology-enabled, direct-to-consumer distribution platform that sells a range of insurance products and healthcare services in the United States. The company sells insurance via three main categories: Senior; Life; and Auto & Home. The stock currently trades around $1.25 a share and sports an approximate market capitalization of $210 million. The company's fiscal year starts on July 1st.

SelectQuote's Senior segment consists of commissions generated from the sale of Medicare Advantage, Medicare Supplement, prescription drug, as well as dental, vision, and health plans. The Life segments comprises commissions from the sale of life and final expense policies and Auto & Home are self-exclamatory.

SelectQuote generates leads through search engine marketing, radio, television, and third-party marketing partners. The company's technology platform then routes the lead to an agent best suited to service that particular lead. If a policy is underwritten, SelectQuote receives a "first-year" commission from the carrier and a further commission on any subsequent policy renewals.

First Quarter Results:

SelectQuote posted its first quarter numbers on November 2nd. The company delivered a GAAP net loss of 19 cents a share, 8 cents above expectations. Revenues rose better than 43% on year-over-year basis to $232.7 million, nearly $30 million north of the consensus. SelectQuote broke down results by business line within its first quarter press release .

First Quarter of Fiscal Year 2024 – Segment Highlights

Senior

• Revenue of $89.9 million
• Adjusted EBITDA* of $(1.3) million
• Approved Medicare Advantage policies of 97,681.

Healthcare Services

• Revenue of $97.4 million
• Adjusted EBITDA* of $2.3 million
• Over 52,000 SelectRx members.

Life

• Revenue of $37.8 million
• Adjusted EBITDA* of $5.2 million.

Auto & Home

• Revenue of $9.0 million
• Adjusted EBITDA* of $3.3 million.

It was the seventh consecutive quarter the company has delivered " materially improved operating results in each of their business segments" according to company leadership. Growth was highlighted this quarter by a 60% gain in year-over-year SelectRx memberships which now stand at 52,000. Almost all of those new memberships came from SelectQuote's Medicare Advantage business.

Management reaffirmed previous FY2023 revenue guidance of between $1.05 billion to $1.2 billion with a net loss in a range of $22 million to $50 million. Adjusted EBITDA is expected in a range of $80 million to $105 million.

Analyst Commentary & Balance Sheet:

All three analyst firms - RBC Capital ($3 price target), Citigroup ($1.75 price target) and Credit Suisse ($3 price target) - that covered the company currently have Hold/Neutral ratings on the stock.

Approximately one percent of the outstanding float in the shares are currently held short. Several insiders bought shares in the stock in May and September totaling nearly $2 million collectively. This is the only insider activity in the equity so far in 2023.

The company ended the third quarter with just under $50 million of cash and marketable securities on its balance sheet . SelectQuote lists is net long-term debt at just over $660 million at the end of its first quarter according to the 10-Q filed for the quarter. Net interest expense for the quarter was just over $21 million, an increase of nearly $5 million from 1Q2023.

Verdict:

The company lost 35 cents a share in FY2023 on $1 billion in revenues. The one analyst firm that has posted projections on SLTQ has the company losing 21 cents a share in FY2024, followed by losses of 12 cents a share in FY2025. It sees revenue growth in the low teens in both years.

It appears the company is showing some progress in narrowing its losses and insider buying in a stock is almost always encouraging. That said, the company has destroyed a ton of shareholder value since coming public via IPO in March of 2023.

And profitless small cap concerns are not exactly in vogue in this environment of the highest interest rates since just before the Great Financial Crisis. Especially ones with a good slug of long-term debt. This is one key reason the small cap Russell 2000 Index (RTY) is down for 2023 even as the NASDAQ (COMP.IND) and S&P 500 (SP500) have posted gains of over 43% and 16%, respectfully. Therefore, until SelectQuote, Inc. gets closer to being profitable or there is a massive investor sentiment shift in the favor of small caps, the story around the company is one to watch, not invest in at this time.

If you look at how the federal government spends our money, it’s an insurance conglomerate protected by a large, standing army .”? Ezra Klein.

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