Goosehead Insurance

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Goosehead Insurance, Inc. is a rapidly growing independent insurance agency that utilizes a franchise model to distribute personal lines insurance products across the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Goosehead Insurance (GSHD) operates in the personal lines insurance brokerage industry through a hybrid model of corporate and franchise agents, with a focus on growing its franchise channel.

  • Revenue Distribution: The company’s revenue streams are primarily categorized into:
    • Commissions and agency fees: generated from insurance sales handled by corporate agents and agents under the Franchisee agreement.
    • Franchise royalties: Revenue coming from Royalty and other fees from the franchised operations.
    • New business commissions: Commission revenue from Carriers relating to policies in their first term sold by franchise sales agents, typically representing a high percentage of overall earnings.
    • Renewal commissions: Commissions from retained policies from franchise sales agents.
    • Agency Fees: Fees generated from a portion of the overall premium that a carrier pays to the agency.
    • Ancillary Revenues: Other revenues, including cost recovery from carriers and other miscellaneous income.
  • Industry Trends: The insurance industry is undergoing a transformation with rapid growth in independent agencies, which have increased the ability to compete and to retain talent through the use of technology.
    • The competitive landscape for personal insurance distribution is increasingly fragmented.
    • The insurance industry is heavily regulated and faces many challenges.
    • In a growing market, there is increasing competition for qualified agents.
  • Competitive Landscape: Goosehead operates in a competitive market with players ranging from large insurance carriers with captive agents to other independent agencies utilizing a more traditional agency model, and online agencies that leverage technology in distribution.
  • What Makes Goosehead Different?

Goosehead’s model includes a large degree of tech enablement, along with multiple revenue streams and focuses on acquiring experienced agents that will help the agency grow. They are one of the largest players in the market which gives them some competitive advantages. The agents are not employees and act as independent businesses which allows Goosehead to have very little infrastructure costs.

  • Their focus on the high-net-worth sector and providing personal lines insurance (such as Home and Auto) to a very fragmented industry in an effort to leverage scale are differentiators, that can give the company an edge.
  • Goosehead is targeting independent agents that, historically, have used more rudimentary methods to provide quotes or customer service. Goosehead gives agents a tech platform, training, and all the resources they need to compete which makes it a compelling option for those agents to shift to this model.
  • The franchise system provides a good way for growth without increasing company expenses. It acts as a kind of flywheel that generates increasing revenue streams as the company grows.
  • Management’s View: Management believes their competitive position comes from their scalable infrastructure and the quality of agents, all which allows them to continue to grow at a high rate.

Financials

The financials for Goosehead are quite complicated, but I will try to simplify them.

  • Revenues:
  • In the nine-months ended September 30, 2024, Total Revenues increased 19.3% compared to the same period in 2023, from $160.4M to $191.5M.
  • Core Revenue increased 21.8% during the same time from $134.3M to $163.7M. *New business revenue for Goosehead is trending lower and the majority of growth is coming from renewals and core revenue.
  • Profitability and Margins:
  • EBITDA margins were 22% in Q3 2024 and 23% in Q3 2023.
  • Adjusted EBITDA margin decreased from 27.1% in 2022 to 24.2% in the last three quarters.
  • They are trying to target 35% operating margins in the long term.
  • Net income was $4.2M in Q3 2024, down from $9.0M in Q3 2023.
  • Net income from the most recent 9 months was $8.1M, down from $19.7M from the same period last year.
  • EPS was 0.15 in Q3 2024, down from 0.34 in Q3 2023.

  • Diluted EPS is at 0.15, which is down from 0.33.

  • The gross margins of this business is very high, but those gross profits are reduced significantly due to the high amounts of operating expenses the company incurs in its attempt to fuel growth.
  • Balance Sheet Health:

The business looks to be in a good financial position, with about $50 million in cash and cash equivalents, very little short-term and long-term debt and good equity balance. * They have the ability to use their cash to make strategic acquisitions if needed. * They have high revenues, low liabilities, and a healthy equity position, meaning that they have more than enough capital to finance their business. * They also have a $100 million credit line for further acquisitions. * However, this is based on current financials and things can change.

Moat Rating

Moat Rating: 2 / 5

  • Intangible Assets (Brand): Goosehead relies on strong brand recognition in a fragmented market, however, it is difficult to ascertain the pricing power of their brand.
  • Also there have been some claims in regards to the brand from agents, showing they use a lot of questionable techniques, this could harm the reputation of the brand.
  • Switching Costs: There are no notable switching costs for customers, and it is not very sticky.
  • Network Effects: Goosehead has minimal network effects.
  • Cost Advantages: Goosehead has some minor cost advantages due to the franchise model where a lot of costs are moved to the franchisees. In addition, the large scale may also create some benefits in the long run. They also use tech-enabled processes, but do not seem to have any major competitive advantages.

Justification: Goosehead has elements of a moat, primarily the scale and the franchise model that reduces costs. However, there are not high barriers to entry and as a result this business is vulnerable to competition. Also, they do not exhibit any remarkable pricing power or switching costs. Given all of these factors, I feel a score of 2 is justified.

Risks to the Moat

  • Competition: New entrants or well-capitalized competitors with better agent technology may steal market share and disrupt their operations.
  • Regulation: Changes to insurance regulations could hurt their ability to operate or cause significant new expenses.
  • Franchise model: The franchise model gives more power to the franchisee and it is difficult to control all aspects. Also, if for any reason, franchisees have a hard time or do not have the capabilities to succeed, it may hurt the earnings of the company as well.
  • Recruitment: Difficulty attracting high-quality agents may reduce their expansion opportunities.
  • Interest rates and Economic Downturns: Increasing interest rates or economic downturns can potentially decrease the demand for their services and affect their operating results.
  • Debt: Although they do not have too much debt, it is a risk as debt is an obligation to repay that can affect the operations and balance sheets.

Business Resilience

  • They are reliant on recruiting capable agents and their ability to grow revenues sustainably.
  • They may be negatively affected in times of high interest rates and economic downturns.
  • They are subject to regulations that can cause more costs or limit their ability to operate.
  • They are still a fairly young company.
  • They will have to continually improve their technology to stay competitive.

Understandability Rating: 2 / 5

  • The business model (franchise) is simple to understand.
  • However, all of the data available through public filings is extremely complex and not at all easy to interpret without a high amount of technical knowledge and experience. This reduces the understandability by a lot, because this makes the business complicated for the common investor.

Balance Sheet Health Rating: 4 / 5

  • The company exhibits relatively low levels of debt.
  • The cash position is healthy and increasing, which will allow them to fund acquisitions and further growth.
  • Equity is steadily growing.
  • The current liabilities are kept to a low level.
  • Overall the balance sheet is well-managed.