IPO Launch: GoHealth Proposes $750 Million IPO Terms

IPOStreet

GoHealth (GOCO) intends to raise $750 million in an IPO of its Class A common stock, according to an amended registration statement.

The company provides online health insurance software technologies to industry as well as direct-to-consumer signups for Medicare Advantage.

GOCO has demonstrated a strong growth trajectory, excellent prospects, solid balance sheet, impressive operational metrics and a reasonably priced IPO.

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Chicago, Illinois-based GoHealth was founded to improve online health insurance quoting through brokers. The firm expanded to offer its services directly to consumers via GoMedicare and now accounts for approximately 10% of Medicare Advantage enrollments in the U.S.

Management is led by co-founder and Chief Executive Officer Clint Jones, who was previously the Intranet Market Manager for HOLT Value, a former division of Credit Suisse.

Below is a brief overview video of GoHealth:

Source: GoHealth

The company’s primary offerings include:

  • Medicare - Internal
  • Medicare - External
  • IFP - Individual and Family Plans
  • Other - Internal

GoHealth has received at least $869 million from investors including Centerbridge Capital Partners.

The company acquires leads through search engine marketing, social media networks, organic Web traffic, television and mailers.

GoHealth is paid on a commission basis by insurance carriers when customers enroll in their products as well as for recurring enrolment.

Marketing & Advertising expenses as a percentage of total revenue have been rising as revenues have increased.

The Marketing & Advertising efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Marketing & Advertising spend, dropped to 2.8x in the most recent reporting period.

Below are various management supplied customer acquisition cost [CAC] and lifetime value [LTV] metrics:

gohealthltvdata

Source: Company registration statement

The figures above show strong LTV multiples for various segments of its business.

According to a 2020 market research report by IBISWorld, the market for online insurance brokerage is expected to reach $31.3 billion in 2020.

The average annual growth in online insurance was approximately 9% from 2015 to 2020.

The main drivers for this expected growth are an increased comfort level of usage of online information and coverage sources for insurance as well as improved technology offerings to automate the process for consumers.

Also, in 2019, one-third of all Medicare participants were also enrolled in Medicare Advantage plans. As Baby Boomers retire at increasing numbers, the growth in Medicare and Medicare Advantage plan participants will increase accordingly, at about 8% per year over the near term.

Major competitive or other industry participants include:

  • AARP
  • Health Insurance Brokers
  • Carrier-employed agents
  • Independent agents and brokers
  • Internet marketers

GoHealth’s recent financial results can be summarized as follows:

  • Sharply growing topline revenue
  • Variable operating profit and margin
  • A swing to strongly positive cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

gohealthpl

Source: Company registration statement

As of March 31, 2020, GoHealth had $152.4 million in cash and $840 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was $12.8 million.

GOCO intends to sell 39.5 million shares of Class A stock at a midpoint price of $19.00 per share for gross proceeds of approximately $750.5 million, not including the sale of customary underwriter options.

Class A stockholders and Class B stockholders will each be entitled to one vote per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $6.7 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 12.61%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds purchase the underlying LLC interests of the operating company.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Goldman Sachs, BofA Securities, Morgan Stanley, Barclays, Credit Suisse, Evercore ISI, RBC Capital Markets, William Blair, Cantor, and SunTrust Robinson Humphrey.

Commentary

GOCO is seeking an IPO transaction to buy the LLC interests of the operating company and hopefully have something left over for future expansion plans.

The company’s financials show strong revenue growth, a swing to operating profit and virtually at net breakeven, with a sharp swing to positive cash flow from operations.

Marketing & advertising expenses as a percentage of revenue have fluctuated as revenues have increased, while the firm’s marketing & advertising efficiency ratio has dropped in the most recent period.

The market opportunity for online insurance and with Medicare Advantage in particular is significant and GOCO is well positioned to take advantage of positive trends in both segments.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 88.2% since their IPO. This is a top-tier performance for all major underwriters during the period.

As a comparable-based valuation, the NYU Stern School basket of publicly held Financial Services companies (Non-bank and insurance) had an average EV / Revenue multiple of 30.15 in January 2020.

The firm, which is not an exact comparable to the NYU basket, is seeking an EV/Revenue multiple of 11.04x at IPO.

As a technology provider to industry as well as a front end to consumers for its Medicare Advantage signup, GOCO is a bit of a hybrid, so is difficult to pin down for a valuation comparison.

With an EV/Multiple of 11x at IPO, management appears to be essentially valuing the firm as a software company.

Given its growth trajectory and financial results, I don’t have a problem with this approach.

Management has demonstrated enviable CAC/LTV metrics, with its Medicare Advantage Internal business segment producing strong metrics.

Additionally, while the firm is private equity-owned by Centerbridge, it isn’t heavily debt-laden.

Given its growth trajectory, prospects, balance sheet, operational metrics and a reasonably priced IPO, my opinion is a BUY at up to $19.00 per share.

Expected IPO Pricing Date: July 14, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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