Stock HealthEquity: Quality company, but probably not worth the price (NASDAQ:HQY)
When investors think of the healthcare space, their minds often turn to companies that own hospitals or to pharmaceutical companies or healthcare providers. But one often overlooked area involves the HSA, or Health Savings Account. Health savings accounts allow workers to set aside money before taxes in order to use these funds for health care purposes. They are a major tool for millions of Americans who ultimately help reduce the burden on America’s expensive healthcare system. And a company that is dedicated to providing this type of offering, not to mention other services, is EquityHealth (HQY). Over the past few years, the company has experienced tremendous growth. This growth continued during the current fiscal year. However, cash flow has been very attractive for the past few years and is growing alongside revenue. Ultimately, HealthEquity appears to be a high quality company for investors to consider. But that doesn’t mean it’s a great investment prospect. Today, stocks look rather expensive and are, at best, fairly valued. More likely than not, they might actually be overpriced to some degree.
A health care spending game
HealthEquity is a diverse provider of various medical offerings and technologies. The core of the company’s offerings is the HSA. Based on data covering the company’s last quarter of fiscal 2022, it manages nearly 7.21 million HSA accounts with a combined value of $19.62 billion. That’s up from the 5.78 million accounts the company had a year earlier, which had a combined value of $14.34 billion. Management did not provide market share data covering the last fiscal year. But they said in their last annual report that their market share had grown from 4% in 2010 to 16% by the end of 2020. This figure is most likely higher today.
In addition to managing HSAs, the company also has another type of account it oversees called CDB, or consumer-focused benefits plan. These are offered by employers and include flexible spending accounts and healthcare reimbursement arrangements. Currently, the company has 7.19 million in its portfolio, up from 7.03 million a year earlier. This brings the total number of accounts the company has to 14.40 million, up from 12.81 million at the end of its 2021 fiscal year.
As part of its business model, the company also offers technology services that include multiple cloud-based platforms that their members can access online through which individuals can make health savings and spending decisions. Through this online platform, customers can also pay their healthcare bills, view different treatment options and prices, receive personalized benefits and clinical information, earn various wellness incentives, grow their savings and even make other investment choices. Much of this functionality is the result of the company’s acquisition of WageWorks in 2019, a deal valued at around $2 billion. In addition to all this, the company also offers a mutual fund investment platform and provides access to an online-only automated investment advisory service which it makes available to all its members whose account balances exceed a certain threshold. Other miscellaneous offerings include COBRA continuation services to employ your clients, healthcare reimbursement terms, and even commuter programs that provide their users with special pre-tax treatments.
Over the past few years, management has been very successful in growing the business. Although organic growth has taken place, much of this expansion is attributable to its acquisition activities. Between 2018 and 2021, for example, the company saw its revenue grow from $229.5 million to $733.6 million. Official financial results were not provided for the 2022 fiscal year. But the company said revenue is expected to be between $754 million and $756 million. At the midpoint, this would imply a year-over-year growth rate of 2.9%.
As far as profitability is concerned, the situation is a little more volatile. Net income has been all over the map, but it’s been consistently positive for the past few years. What’s really exciting, though, is the operating cash flow. Between 2018 and 2020, this number increased from 81.7 million to 181.6 million. During this same period, EBITDA followed a similar trend, increasing from $84.7 million to $240.8 million. Management provided guidance for fiscal year 2022. Based on the data provided, EBITDA is expected to be between $232 million and $235 million. Applying the same year-over-year growth rate to operating cash flow would imply a reading of $176.1 million. And non-GAAP earnings for 2022 are expected to be between $108 million and $110 million.
By taking this data, we can effectively assess the business. On a price/adjusted earnings basis, the company’s multiple appears to be around 40. The price/operating cash flow multiple is significantly lower but still high at 24.8. And the company’s EV/EBITDA multiple is expected to be around 19.9. Truth be told, these levels are pretty high no matter how you look at them. And this is true even if you compare them to other similar companies. On a price-earnings basis, the five companies I identified as most similar to HealthEquity had a range between 17.9 and 35.8. Using the price/operating cash flow approach, the range was 8.4 to 23.2. And looking at the multiple EV to EBITDA target images would give a range of 11.1 to 17.1. In all three cases, HealthEquity was the most expensive of the bunch. Although it is worth mentioning that these comparable companies are all significantly larger than our perspective. The smallest of them, by market cap, is more than four times its size. And the largest is nearly 101 times its size. Higher trading multiples can be attributed to smaller companies if investors anticipate rapid growth for an extended period. This expectation may therefore be at the origin of some of this disparity and could be justified if growth continues.
|Company||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Centene Corporation (CNC)||35.8||11.4||13.1|
|UnitedHealth Group (UNH)||25.4||19.7||17.1|
|Molina Healthcare (MOH)||27.0||8.4||11.1|
|Anthem (ANTM)||17.9||13.0||N / A|
|Human (HUM)||18.3||23.7||N / A|
Based on the data provided, HealthEquity appears to be an interesting company with an interesting future for it. I suspect that in the long run, the company will do quite well. But that doesn’t mean he’s a strong opportunity right now. I would argue that the high-priced stocks trading are probably not warranted, even if we assume rapid growth will resume after fiscal 2022. At best, stocks could be closer to fair value. But at the end of the day, none of that changes the fact that stocks aren’t cheap enough to be a compelling opportunity right now. For this reason alone, I think investors had better look elsewhere for opportunities if they want solid returns as part of their investment results.