SelectQuote: Insider Buying But A Significant Debt Load (NYSE:SLQT) -LSB

Insurance is like a life jacket. It’s a little annoying when you don’t need it, but when you do, you’re more than grateful to have it..” – Unknown.

Today we put SelectQuote, Inc. (NYSE:SLQT) in the center of attention. As you can see below, this online insurance broker’s stock is deep, deep in ‘Busted IPO’ territory. The company reported its latest quarterly results earlier this month and has seen some good-sized internal acquisitions in recent months. Signs that management is finally righting the ship? An analysis follows below.

Company Summary:

This small-cap company is headquartered outside of Kansas City in Overland Park, KS. SelectQuote offers and operates a technology-enabled, direct-to-consumer distribution platform that sells a variety of insurance products and healthcare services in the United States. The company sells insurance through three main categories: Senior; Life; and Auto & Home. The stock is currently trading around $1.25 per share and has an approximate market capitalization of $210 million. The company’s fiscal year begins on July 1.

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

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 who is best suited to serve that particular lead. If a policy is underwritten, SelectQuote receives a “first year” commission from the operator and a further commission for each subsequent renewal of the policy.

First quarter results:

SelectQuote released its first quarter Numbers on November 2. The company posted a GAAP net loss of 19 cents per share, 8 cents above expectations. Revenue rose more than 43% year-over-year to $232.7 million, nearly $30 million north of consensus. SelectQuote broke down results by line of business within the first quarter Press release.

First Quarter FY 2024 – Segment Highlights

Senior

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

Health Care 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 that the company has delivered “materially improved operating results in each of their business segments” according to company management. Growth was highlighted this quarter by a 60% year-over-year increase in SelectRx memberships, which now stand at 52,000. Almost all of these new memberships came from SelectQuote’s Medicare Advantage business.

Management reaffirmed previous 2023 revenue guidance of $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 Comment and 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 shares outstanding are currently short. Several insiders bought stakes in the stock in May and September totaling about $2 million collectively. This is the only domestic activity in equity so far in 2023.

The company ended the third quarter with just under $50 million in cash and marketable securities BALANCE. SelectQuote’s list is net long-term debt at just over $660 million at the end of its first quarter according to 10-P presented for the quarter. Net interest expense for the quarter was just over $21 million, an increase of nearly $5 million from Q1 2023.

Verdict:

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

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

And small, unprofitable concerns aren’t exactly fashionable in this environment with the highest interest rates since just before the Great Financial Crisis. Especially those with good long-term credit. This is a major reason for the small-cap Russell 2000 Index (RTY) is down for 2023 even though the NASDAQ (COMP.IND) and the S&P 500 (SP500) have recorded gains of over 43% and 16%, respectively. Therefore, while SelectQuote, Inc. come close to being profitable or have a massive shift in investor sentiment in favor of small caps, the story around the company is one to watch, not invest in right now.

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