Goosehead Insurance (GSHD) – Flying North This Spring
Goosehead reported Q1 results after the close yesterday that should have investors feeling pretty good about the company’s ability to weather this pandemic.
The company changed to a new accounting standard (ASC 606) in Q4 2019 so historical comparisons don’t paint a truly accurate picture. If we don’t adjust for the change then Q1 2020 revenue of $20.4 million (which beat expectations) was down 12%. If we go with management’s measure of “core revenue,” which strips out contingent commissions and initial franchise fees, then core revenue was up 32% to $18.2 million. That result was also better than analysts expected. Other relevant metrics that indicate the health of the business were that total written premiums were up 46% (well above the 2020 full-year guidance range of 32% to 40%) and total franchises grew 45%. On the bottom line, adjusted EPS of $0.00 was slightly below expectations due to higher expenses.
Management surprised us by reiterating 2020 full-year guidance, an almost unheard of occurrence these days. Management continues to see total written premium growth of 32% to 40% helping to drive revenue up 29% to 36%. Part of the company’s resilience is due to the dynamics of the Franchise channel, which now drives 75% of new business yet only 45% of current revenue. That revenue share will begin to shift higher as higher renewal commissions from this channel pour in. There are 333 franchises that are not yet up and running and which are an important part of the 2021-22 growth story, so we’ll want to see progress there in the next quarter.
Stepping back, one of the reasons we jumped into Goosehead way back when was because of its disruptive, technology-enabled business model for selling personal lines insurance. This is paying dividends right now. Whereas many other insurance brokers are struggling to find their way during this pandemic, Goosehead is marching forward because its platform is built on cloud software that allows for remote work and access to databases to generate leads. There is ample potential for the company to pick up some of the business that other brokers can’t handle because of inferior technology.
As for what to do now, I’m sticking with a hold rating. GSHD closed yesterday’s session just 11% off its previous high and the market is indicated to open lower today. I like the stock and think it is still great long-term, and we could easily see shares trade higher today based on this report and outlook. But as far as new buying goes right now, I think that’s best postponed for another day. HOLD