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eHealth Downgraded to Sell on Lackluster Q1 Earnings

Zacks Equity Research

On Jun 14, 2014, Zacks Investment Research downgraded eHealth, Inc. (EHTH) to a Zacks #4 Rank (Sell).

Why the Downgrade?

eHealth has witnessed sharp downward estimate revisions after reporting disappointing first-quarter 2014 results. Shares of this insurance broker have declined 12.3% since the company reported first-quarter results to close at $36.72 in the last trading session. Given its expected negative earnings growth rates for full-year 2014 (25.27%), it has more downside left.

On May 1, eHealth reported first-quarter loss per share of 7 cents, wider the Zacks Consensus Estimate by a significant 250%. First-quarter loss also compared unfavorably with the year-ago earnings per share of 12 cents. This deterioration was mainly due to increase in operating costs and expenses during the quarter. Additionally, eHealth missed the Zacks Consensus Estimate in two of the last four quarters, with an average negative surprise of 165%.

Additionally, for full-year 2014, stock-based compensation expense is expected to increase from 2013, which would then adversely affect results. eHealth’s expenses have been increasing for quite some time. While expense increased nearly 24% in 2013, it rose almost 38% in the first quarter of 2014. In fact, the rise in expenses exceeded revenue growth in both the above-mentioned periods. When the rise is expense is higher than that of revenues, it leads to margin contraction. Thus, we do not expect a near-term improvement in the stock’s performance.

The Zacks Consensus Estimate for 2014 decreased 28.6% to 10 cents per share over the last 60 days. For 2015, most of the estimates were revised downward over the last 60 days, dragging the Zacks Consensus Estimate by 14.9% to 40 cents per share.

Other Stocks to Consider

Not all stocks in the insurance brokerage space are performing as poorly as eHealth. Better-ranked stocks in the same sector that look attractive at current levels include Aon plc (AON), Erie Indemnity Company (ERIE) and Cninsure Inc. (CISG). All these stocks have a Zacks Rank #2 (Buy).

Read the Full Research Report on AON
Read the Full Research Report on ERIE
Read the Full Research Report on EHTH
Read the Full Research Report on CISG

Zacks Investment Research