Via SeekingAlpha.com

Online insurance broker SelectQuote (SLQT) has set terms for its USD450 million IPO. The company plans to sell 18 million shares, priced between USD17 and USD19 apiece. In addition, existing shareholders of the Kansas-based company plan to sell 7 million shares. SelectQuote has a strong business and has posted impressive financial performance in the last couple of years. As I’ll explain in this article, SelectQuote appears to be a good choice to ride some strong trends in the insurance industry.

Company background

SelectQuote is a direct-to-consumer [DTC] insurance distributor which employs television, radio, third-party marketing services and search engine placement for customer acquisition. The company has partnered with over 50 insurance carriers and earns commissions for matching these carries with insurance buyers.

SelectQuote has an interesting split in business segments. Majority of its revenues come from Senior market [57% in FY2019] while Life [33%] and Auto & Home [10%] segments play relatively minor roles. As of March 31, 2020, it employed a total of 922 core agents and 73 flex agents across the three segments. There is high seasonality in this business and first and fourth quarters of the calendar year are busy during the Annual Election Period [AEP] and Open Enrollment Period [[OEP].

It has been around for over 30 years and is pretty much a household name. In these years, it has developed a robust platform, encompassing well-defined processes for lead acquisition, sales closures and aftersales engagement.

Source: SelectQuote’s S-1 Registration Statement

On a strong financial footing

SelectQuote has been registering strong sales growth and this is visible in the top line numbers. In the latest S-1 registration statement, the company has given out data for the nine months ended 31 March 2020 and the calculated run rate for the last 12 months is quite impressive. Over the last three years, the company has doubled its revenues.

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However, the strong performance isn’t just limited to top line as adjusted EBITDA has also seen meaningful improvement. Although adjusted EBITDA margin slipped below 30% in the trailing 12 months, 28.7% is still quite a good level and leaves enough room for further improvement.

SelectQuote’s consolidated financial performance (USD mil.)

FY 2018

FY 2019

TTM 31 March 2020

Sales

233.7

337.5

464.5

Income from operations

43.2

96.3

113.7

Adjusted EBITDA

49.9

105.3

133.4

Adjusted EBITDA margin (%)

21.4

31.2

28.7

Net income

34.9

72.6

74.0

Net income margin (%)

14.9

21.5

15.9

Source: SelectQuote’s S-1 Registration Statement

For the nine months ended 31 March 2020, the company posted net income of USD61.1 million but payouts to preferred stock holders meant that EPS for the period stood at negative 38 cents. However, this swings to positive 46 cents taking into consideration mandatory conversion of preferred stocks post IPO.

On the balance sheet side, SelectQuote has been prudent and has run operations with minimal debt. It had a debt of just USD11 million as of 30 June 2019 and this amount increased to USD411 million as of 30 June 2020, primarily to pay preferred stock dividend. Thankfully, these preferred stocks are being converted into common equity so no more preferred stock dividends.

At the midpoint of pricing range, the company is expecting IPO proceeds to be around USD276 million, adjusting for fees and commissions. Provided that 25% of proceeds will go towards debt reduction, the company’s Enterprise Value [EV] would be around USD3.27 billion. Accordingly, its EV/EBITDA ratio turns out to be 24.5 which is not inexpensive.

However, SelectQuote offers comfort on other valuation parameters and is better placed than its competitor EverQuote (EVER) which has performed very well lately. EverQuote listed couple of years ago and struggled initially but has emerged stronger amid growing insurance sales through its online channel. It is important to note that EverQuote isn’t profitable yet.

SelectQuote’s Valuation Comparison with EverQuote

SLQT

EVER

Price (in USD)

18

49

EV/EBITDA

24.51

NA

Price/Sales*

2.86

4.80

Price/Book Value

6.54

23.60

* TTM Sales considered for SLQT

Post-issue values considered for EV and Book value

Source: SelectQuote’s S-1 Registration Statement, Author Research

Several levers in place

This highly scalable business model and ever increasing number of consumers shifting towards online channels to make purchasing decisions for their insurance needs mean there is a long runway for the company. SelectQuote estimates its addressable market for its three business lines is USD180 billion. While we don’t have to go necessarily by these lofty numbers, there is no denying that the potential is immense in online sales of insurance.

As mentioned above, Senior market is the biggest segment for the company and there are some strong trends currently underway in the Senior market with the aging Baby Boomers. Take a closer look at this graph to get the sense of expanding market potential for SelectQuote.

Source: Peter G. Peterson Foundation

Another favorable trend is the increasing penetration rates of Medicare Advantage and Medicare Supplement policies.

Source: SelectQuote’s S-1 Registration Statement

Finally, some recent developments and behavioral changes in the wake of Coronavirus disease, are going to be particularly helpful for the company. The IPO comes at an opportune time when expected decline in premiums will boost churn rates for insurance players. This means increased business for aggregators like SelectQuote.

Conclusion

SelectQuote operates quite a simple but attractive business model with limited downside as there is no underwriting involved. I also like the fact that it is a focused player with only three major lines. The company started with life insurance business line in 1985 and Senior Health and Auto & Home were introduced in 2010 and 2011. This means there has been no new business addition in the last 9 years.

In its roadshow presentation, the company indicated it may add annuity products in its portfolio in the coming years but I’m totally comfortable with the current setup. Insurance selling is a cluttered and commoditized market and it may sound counter-intuitive to keep a narrow focus. However, scratch the surface and it is not difficult to see that too many moving parts create unnecessary friction and delays in operations. From an investor’s perspective too, I guess it makes tremendous sense to deal with focused plays.

Overall, I like the proven and highly scalable model that has a long runway. Moreover, it is a great proxy to play the multi-year theme of offline to online migration of one of the most basic needs of human survival in modern times. Moreover, the facts that SelectQuote has profitable operations and comfortable valuations should not be overlooked by investors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any 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.