Insurance

Goosehead Insurance: Stock Price Overvalued (NASDAQ:GSHD)

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Goosehead Insurance, Inc. (NASDAQ:GSHD) remains formidable amidst pandemic disruptions. Its solid revenue growth shows it can sustain its operating capacity. It still has more potential this year as the pent-up demand for RVs and properties persists.

Meanwhile, the stock price has been divorced from its fundamentals since 4Q 2021. But the overvaluation suggests it is trading 10x-20x higher than the reasonable price. The downtrend may persist, but the boom in the industry may still put upward pressure.

Company Performance

Goosehead Insurance, Inc. has been operating for only twenty years, but it proves its durability. It has witnessed and survived crises that turned the financial sector upside down. Ever since its IPO, GSHD has shown consistent revenue growth. All its business segments thrived as the operating capacity. Indeed, the IPO helped it finance its expansion and strengthen its market presence. It proved fruitful as it captured more demand and withstood the scourge of the pandemic. Also, it exceeded my expectations in the previous article as the actual revenue was 16% higher.

Today, Goosehead shows more promising growth prospects. In fact, the insurance industry as a whole continues to flourish. Indeed, the pandemic and natural calamities highlight the importance of having insurance. It is no wonder the company sees an influx of customers amidst drastic changes. The operating revenue for this quarter is $41 million, or a 32% year-over-year growth. Thanks to the massive expansion of the company in 2021. It enjoys the spillovers of increased office openings. Now, it can cater to more clients across the country as the demand remains on the rise. Also, its digital agents allow it to reach out to clients amidst the restrictions.

Goosehead Insurance Operating Revenue and Operating Expenses

Operating Revenue and Operating Expenses (MarketWatch)

Likewise, the total amount of its operating expenses is $47 million, or a 47% increase. With that, the company is now an operating margin of -0.145. The values of the core operations may become a turnoff for many investors. It may show inefficiency and mismanagement of resources amidst macroeconomic pressures.

Goosehead Insurance Operating Margin

Operating Margin (MarketWatch)

But we must remember that value still reflects the impact of the previous expansion. We can see that it is starting to pay off and may become fruitful in the succeeding quarters. Most of all, the company puts its employees as its priority. The increase in wages and benefits are the primary drivers of the operating expenses. Hence, the company shows a strong labor capacity, leading to higher productivity. It also sustains its operating size without sacrificing the quality of its services.

Moreover, the expansion is a wise move as the hype about RVs, cars, and properties intensifies. The thing is, there are more opportunities in the market that Goosehead may take advantage of. As more people buy RVs, cars, and houses, the demand for RV, auto, and property insurance is high. As such, it is no surprise that analysts are optimistic about the performance of the industry. These will be discussed further in the next section.

How Goosehead Insurance, Inc. Can Maintain Its Market Position

Despite the operating loss, Goosehead Insurance shows a strong market positioning. The increase in the operating expenses is not due to operational inefficiencies. Personally, it is more of an investment. Healthier and happier agents and employees are more effective, leading to more clients. The increased office openings and digital capabilities lead to better accessibility. Aside from the larger operating capacity, it is bound to see economies of scale for the next few years.

It can be proven by its stable Balance Sheet. Borrowings are more manageable today after the drastic increase in the previous year. Of course, the recent expansion continues to drive both borrowings and expenses. But this year, the accounts appear to be more stable. Plus, there is maintained liquidity. Its cash and receivables, for instance, comprise 22% of the total assets. Also, its fixed assets are 57% larger than the comparative quarter. As such, it is capable of maintaining its current size with ease and prudence. It may also increase its operating capacity by 30% even without financial leverage. The substantial revenue growth and liquidity show efficient asset management. There is also financial consistency, which shows sustainability.

Goosehead Insurance Cash and Current Receivables, Fixed Assets, and Borrowings

Cash and Current Receivables, Fixed Assets, and Borrowings (MarketWatch)

But aside from its solid fundamentals, external forces may drive its growth further. Goosehead operates across a broad range of properties from houses to RVs and cars. Today, the boom in the market persists, allowing the company to sell more of its products. For example, housing demand remains on the rise despite the skyrocketing prices. In the last two years, the median price has already increased by 30% from $329,000 to $428,700. Housing shortage remains a challenge, but inflation may start to slow it down this year.

Despite this, home insurance is expected to keep increasing. Global insurers estimate that property insurance would go up 3.7% in 2022 and 3.3% in 2023. The frequency of natural disasters is also driving the demand for home insurance. Home insurance may also cover home belongings, such as furniture and equipment. With more demand amidst restrictions, VR is now a staple for the real estate market. It is no surprise that real estate may account for $2.6 billion in the VR market. Fortunately, Goosehead Insurance is already adapting to digital transformation. With its digital agents, it can make virtual transactions with its target market.

Home Insurance Increase Rate

Home Insurance Increase Rate (Insurance Journal)

Cars and RVs are other potential growth drivers of Goosehead Insurance. Despite the rising prices of fuel, the demand for outdoor recreation remains high. In a recent survey, new and used cars are still a staple. Despite the easing of restrictions, 76% of commuters prefer driving a private car. The remaining portion is public transportation, bikes, and other alternatives. That is why analysts estimate that 15.2 million cars will be sold this year or a 1.2% year-over-year growth. Also, more drivers today are willing to pay $1,732 for full coverage car insurance.

Commuter Preferences

Commuter Preferences (Statista)

Likewise, RVs are heating up as travelers choose to go local this Spring and Summer. A recent survey shows that 56 million Americans plan to buy or rent RVs for their summer travel. The number may rise further to 65 million in twelve to twenty-four months. As such, the RV market may continue to expand in the following years. This trend may benefit RV insurance providers like Goosehead Insurance. Recent estimation shows that the RV insurance market may increase by 4.2% per year.

People Buying or Renting RVs

People Buying or Renting RVs (Camper Report)

Given these potential drivers, the increased labor and office openings are timely. It may spur growth in its core operations. Its increased digital capabilities may improve its business processes and attract more clients. The operating revenue and expenses may increase to $196-320 million and $186-256 million. Likewise, the succeeding quarters may offset the operating loss in 1Q 2022. Hence, the operating margin may increase to 0.052-0.20.

Goosehead Insurance Operating Revenue and Operating Expenses

Operating Revenue and Operating Expenses (Author Estimation)

Goosehead Insurance Operating Margin

Operating Margin (Author Estimation)

Price Assessment

The stock price of Goosehead Insurance, Inc. has been in a downtrend since the previous quarter. At $51.25, it has already been cut by 66% from the starting price. The trend has been steep, and the price is already far lower than in my previous article. Despite this, the potential overvaluation is evident. The PE Ratio shows that GSHD is trading 15x-20x higher than the reasonable level. If we compare it to the operating revenue, the overvaluation is still evident by 8-10x. To value it better, we can use the DCF Model.

FCFF

$16,800,000

Cash

$24,800,000

Outstanding Borrowings

$16,000,000

Perpetual Growth

8.00%

WACC

4.80%

Common Shares Outstanding

20,000,000

Stock Price

$51.25

Derived Value

$30.44

The derived value is a confirmation of the potential overvaluation. It shows that the stock is trading 68% higher than the ideal price. For the next 12-24 months, there may be a downside in the stock price. Nevertheless, the growth prospects of the company are still attractive. There may be another upward pressure if the boom in the industry continues.

Bottom line

Goosehead Insurance, Inc. remains stable with its impressive revenue growth and liquidity. Its solid performance shows its adequacy to sustain itself and potential expansion. But the stock price still seems divorced from the fundamentals. Although growth prospects are still attractive, the overvaluation may tell a different story. The recommendation, for now, is that Goosehead Insurance, Inc. is a hold.


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