September 29, 2020

HealthEquity – Undervalued And Underappreciated Buy

HealthEquity - Undervalued And Underappreciated Buy

HealthEquity (HQY) is an undervalued and underappreciated stock that is a buy at the sub $50 level. The stock is hovering just above its COVID-19 lows despite the epic market rally. HealthEquity (HQY) has fallen from its 52-week highs of $89 to a low of $35 or 60% during the COVID-19 market meltdown. The recent sell-off in equities has resulted in a 20% dive moving from $61 to $48. This sell-off presents a great opportunity for this healthcare cost containment company.

Considering HealthEquity’s unique position as being distinctly disassociated from drug pricing issues, rising insurance costs, or the pharmaceutical supply chain, this sell-off is a great opportunity for an entry point. HealthEquity is in a strong position and being offered at a heavy discount. For long-term investors, HealthEquity presents a compelling picture of growth with a large addressable market moving forward and further strengthened with its acquisition of WageWorks.

HealthEquity’s Q2 Earnings

HealthEquity announced its Q2 earnings with WageWorks being fully integrated into its financial numbers as the acquisition closed on August 30, 2019. Revenue for Q2 was $176 million, growing 103% compared to $86.6 million for the second quarter ended July 31, 2019. Revenue this quarter included: service revenue of $103.8 million, custodial revenue of $46.9 million, and interchange revenue of $25.3 million. HSAs now exceed 5.4 million, an increase of 29% year over year. Total Accounts as of July 31, 2020, reached 12.5 million, including 7.1 million CDBs. Total HSA Assets as of July 31, 2020, were $12.2 billion. Total HSA Assets included $9.0 billion of HSA cash and $3.2 billion of HSA investment assets (Figure 2).

HealthEquity - Undervalued And Underappreciated Buy
Figure 1 – High-level overview of the newly combined HealthEquity company branching out into all segments of consumer-directed benefits

HealthEquity - Undervalued And Underappreciated Buy
Figure 2 – HSA serves as a healthcare cost containment vehicle

COVID-19 Pandemic HSA Awareness

The COVID-19 pandemic will likely bring more attention to the Health Savings Account (HSA) space and may drive demand from more companies and consumers alike. The Health Savings account serves as a win-win for companies and consumers. This is an effective way to contain healthcare costs while allowing funds to accumulate for potential future medical expenses. This space has already been under a secular growth trend, and this pandemic may accelerate the growth of these accounts as awareness spreads.

Conversely, in the short-term, HSA funds may be depleted at a faster rate by account holders. Contributions may fall due to the spike in unemployment, and employer matching contributions may be in jeopardy as liquidity comes into question for many companies that have transitioned into survival mode post-COVID-19. However, over the long term, this trend toward consumer-driven healthcare (i.e., channeling funds into HSAs) is here to stay.

Moat and Business Model

HealthEquity (HQY) has a unique business model that serves as an intermediary servicing the secular growth HSA space that’s largely independent of legislative actions, drug pricing, rising insurance costs while not playing any role in the pharmaceutical supply chain that spans 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. HealthEquity is an intermediary that connects health and wealth to consumers of healthcare.

Diversifying Revenue Streams

HealthEquity made a bold move to acquire WageWorks for approximately $2 billion in an all-cash deal. This acquisition has expanded HealthEquity’s moat in the HSA space while providing new revenue verticals in complementary product offerings. This move is already expanding HealthEquity’s total addressable market as Consumer-Directed Benefits (CDBs) via pre-tax spending accounts such as additional Health Savings Accounts (HSAs), health and dependent care Flexible Spending Accounts (FSAs), health reimbursement accounts (HRA), Commuter Benefit Services, wellness programs, COBRA and other employee benefits are absorbed into its product offerings. This acquisition provides access to a larger client base and access to health brokers that will help drive HealthEquity’s penetration over the long term. The combination of WageWorks’ leading consumer-directed benefits with HealthEquity’s HSA platform is highly synergistic and will drive growth while expanding the total addressable market in years to come.

Summary

Health Equity (HQY) 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. Its WageWorks acquisition further bolstered this via augmenting its core competencies in the Health Savings Account space while providing access to other revenue verticals in the Consumer Directed-Benefits space. HealthEquity is continuing to post strong growth as it expands the number of accounts, manages more custodial assets, expands gross margins, and more accounts are transitioning into investment vehicles. HealthEquity 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 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 WageWorks acquisition has expanded HealthEquity’s moat while providing additional long-term revenue sources for durable growth.

Noah Kiedrowski
INO.com Contributor

Disclosure: The author holds shares in AAL, AAPL, AMC, AMZN, AXP, CMG, DIA, DIS, FB, GOOGL, GS, HQY, IBM, JPM, KSS, MA, MSFT, QQQ, SBUX, SLB, SPY, TRIP, UPS, USO and X. 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.