WageWorks Inc.'s (WAGE) consumer-directed benefits "CDB" programs operate and administer a wide range of tax-advantage CDBs including Healthy Savings Accounts "HAS", Flexible Spending Accounts "FSA", Health Reimbursement Arrangements "HRA" as well as commuter benefits to its clients. These programs allow employees to save their tax money by using pretax earnings to pay for their healthcare and commuter expenses. These programs also help employers to reduce their payroll taxes. As the popularity of these programs is increasing I believe that the company will experience strong growth in its revenues which will eventually help the company to bolster its cash flows in the future. In order to compute the intrinsic value of the stock I have used the free cash flow model. I calculated the intrinsic value of the stock to be $80.98 which gives an upside potential of 21.34 percent.
Why Does Mispricing Persist?
The company is overvalued based on price multiples therefore I believe that investors are reluctant to invest in the stock. However, I do not believe that this is an appropriate method to evaluate the company as the growth stock has higher multiples than the industry. Therefore, I believe that the instead of evaluating the WageWorks on a multiple basis the free cash flow method seems to be the most appropriate methodology to evaluate the company. Rather than giving more weight to current multiples investors should give more weight to its future prospects as the future of the company seems quite positive to me.
Investment Thesis
- Private employee exchange will lead the growth in the top line and will help the company to bolster its cash flows in the future.
- Increasing popularity of consumer-directed health plans will also lead the growth in the top line.
- WageWorks has a 10 percent market share in consumer-directed healthcare benefits and this