HealthEquity Inc. (HQY) has witnessed several volatile moves of significant magnitude over the past few months with sell-offs highly correlated to the overall healthcare sector. Despite the company’s fundamentals, growth narrative, financial profile, and addressable market remaining strong and positive, the stock has underperformed over the past few months. Historically, HealthEquity’s valuation has been rich, so it’s no surprise that the stock has traded off with the broader market downturns, which disproportionally impact growth stocks with high price-to-earnings multiples. HealthEquity has traded in a 52-week range between $101 and $50 and currently trades at the $70 level after posting its most recent earnings. The company continues to post quarter after double-digit quarter growth in revenue and EPS without any debt on the balance sheet. I feel that the stock is incorrectly lumped into the broader healthcare cohort due to its business model and independence from healthcare insurers, the pharmaceutical supply chain, and drug manufacturers. For long-term investors, HealthEquity presents a compelling picture of growth with a large addressable market moving forward.
Incorrect Correlation to Healthcare
HealthEquity’s business model is such that it stands as an intermediary servicing the secular growth Health Savings Account (HSA) space that’s largely independent of legislative actions, drug pricing, rising insurance costs while not playing any role in the pharmaceutical supply chain from health insurers to end user pharmacies. The company simply manages funds allocated for medical, dental, and vision expenses that are deducted on a pre-tax basis and deposited into a dedicated HSA account. The HSA space has grown in popularity as corporate adoption has allowed access to these plans in conjunction with consumer awareness.
Many of the healthcare related stocks have lost significant portions of their respective market capitalization over the past year. Large-cap stocks such as CVS Health (CVS), Walgreens (WBA), McKesson (MCK) and Cardinal Health (CAH) have been some of the worst performing stocks. These stocks have been in secular decline due to the confluence of legislative threats, drug pricing pressures, and pro-single payer healthcare by top Democratic officials. HealthEquity is in a unique position that circumvents many issues that have plagued these stocks. The company is here to stay regardless of the aforementioned hot button issues.
HealthEquity’s Moat
HealthEquity currently manages $8.3 billion in assets across 4.1 million accounts against a potential market maturity of $1 trillion in assets across 50-60 million accounts. The durability of this growth has a long runway due to the secular growth in the HSA market. The company is sitting on largely untapped revenue sources where the vast majority of account holders have yet to invest any HSA money in their investment offerings. Expanding margins for greater profitability is also unfolding as the older the account, the greater the gross margins. The company is currently sitting on a healthy balance sheet with $330 million in cash and cash equivalents with no debt. The company continues to post accelerating revenue, cash flow, margin expansion, and income growth with a strong balance sheet. I feel that HealthEquity will continue to post strong growth as it services the double-digit HSA growth market and manages more assets, accounts, and investments within these accounts. HealthEquity has demonstrated to be a great investment in the proxy healthcare space that’s independent from the health insurances, pharmaceutical supply chain companies, drug makers, or pharmacies.
HelathEquity is uniquely positioned as HSAs are becoming an invaluable option for consumers to contain medical costs and take control of healthcare spending. High Deductible Health Plans (HDHP) coupled with HSAs, has contained family plan deductibles at a far lower level than any other healthcare plan. Additionally, funds deposited in the companion HSA account can be invested into mutual fund options to grow these funds over time. At age 65 these funds can be withdrawn without penalty at your effective rate, effectively serving as a second 401k over time. This dual-purpose account serves as a great means to contain healthcare costs while building wealth via investments over the long term.
HealthEquity’s Q1 2020 Earnings
Recently, the company released its Q1 2020 results and updated investors with total HSA members coming in at 4.1 million, an increase of 17% compared to Q1 FY19. Total custodial assets were $8.3 billion, an increase of 21% compared year-over-year (Figure 1). Q1 revenue came in at $87.1 million, an increase of 25% while adding 89,000 new HSA accounts.
Jon Kessler, President, and CEO of HealthEquity, “HealthEquity delivered excellent first quarter fiscal 2020 results across our key financial metrics, setting the stage for another record year and allowing us to raise our guidance,” said Jon Kessler, president, and chief executive officer of HealthEquity. “We added over 89,000 new HSAs and helped our members grow their custodial assets by over $220 million in the quarter while producing record revenue and earnings. Revenue grew 25% year-over-year, and adjusted EBITDA grew an even larger 31%.”
Figure 1 – Infographic depicting HealthEquity’s big picture metrics
Summary
HealthEquity has continued its path of accelerating revenue, cash flow, and income growth across all segments of its business in the backdrop of an HSA secular growth market. HealthEquity looks compelling after this healthy correction as the long-term narrative remains intact. The company is debt-free and expanding its balance sheet with just over $330 million in cash and cash equivalents. The company is sitting on untapped revenue sources, and gross margin expansion is beginning to bear fruit as accounts age, and more funds are channeled into investment vehicles. HealthEquity is continuing to post strong growth as it expands the number of accounts, manages more custodial assets, expands gross margins, and more accounts transitioning into investment vehicles.
Furthermore, HSAs are serving as a dual purpose as a healthcare containment play offering more value than other insurance options while serving as a second 401k as assets can be withdrawn in retirement without plenty fueling the popularity of these accounts. HelathEquity is uniquely positioned as HSAs are becoming an invaluable option for consumers to contain medical costs and take control of healthcare spending. Best of all, the company’s business model is such that it stands as an intermediary servicing the secular growth Health Savings Account (HSA) space that’s largely independent of legislative actions, drug pricing, rising insurance costs while not playing any role in the pharmaceutical supply chain from health insurers to end user pharmacies.
Noah Kiedrowski
INO.com Contributor
Disclosure: The author does not hold shares in any of the mentioned stocks or ETFs. However, he may engage in options trading in any of the underlying securities. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of www.stockoptionsdad.com where options are a bet on where stocks won’t go, not where they will. Where high probability options trading for consistent income and risk mitigation thrives in both bull and bear markets. For more engaging, short duration options based content, visit stockoptionsdad’s YouTube channel.
