HealthEquity - Great Company, Great Public Offering, Waiting For A Pullback

Aug.11.14 | About: HealthEquity (HQY)


HealthEquity has seen a successful public offering.

Investors are cheerful about rapid growth, profitability and further good prospects.

I like the business as well, hoping for a correction to get a better long term risk-reward opportunity.

HealthEquity (NASDAQ:HQY) provides a technology-enabled service platform which allow consumers to save on healthcare costs.

The company operates in the market for so-called Health Savings Accounts, a rapidly growing and emerging market. I like the growth, profitability and further prospects but won't chase current momentum.

The Public Offering

HealthEquity provides a platform to consumers in order to make better healthcare saving and spending decisions. Customers can furthermore compare treatment options and pricing. All of this is aimed to make educated healthcare decisions also in terms of the tax implications.

The staggering amounts involved and the shift to individual responsibility for some of the healthcare costs will only result in greater demand for these kinds of services according to the company.

Key in the offering is the Health Savings Account, the so-called HSA, which is an account through which consumer spend and save for healthcare on a tax-advantages basis. The company's HSA is integrated with some 20 of the 50 largest health plans in the country including the Blue Cross and Blue Shield plans and the plans offered by some leading companies. With existing partnerships it has access to 55 million consumers, or some 30% of the population under the age of 65 within the US. Of this target population the company has about 1.0 million members, a number which is growing rapidly by some 306,000 over the past year.

HealthEquity sold 9.1 million shares for $14 apiece, thereby generating roughly $127 million in gross proceeds. Shares were sold above the initially guided price range of $10-$12 per share. As far as the S1-Filing reveals to me, all proceeds from this offering will initially benefit the company with no shares being offered by selling shareholders.

At the public offering price of $14, with some 49.5 million shares outstanding, the equity in the business is valued at $693 million.

Banks which aided the company in its process to become a public firm were J.P. Morgan, Baird, Raymond James, Wells Fargo and SunTrust Robinson.


As discussed above, HealthEquity's solutions are in great demand. Consumer demand for better information and comparisons for healthcare solutions is on the rise. This is not just based on desire to find out about the quality of offerings but also as consumers have to bear more of the costs themselves.

Between 2009 and 2013, the number of US health savings accounts has more than doubled to 10.7 million, while the market remains very much underpenetrated. The company cites a report from the Consumer Driven Market Report which anticipates some 50 million HSA's as soon as 2020, with adoption being driven by the Affordable Care Act.

The company's own business model is very simple and attractive. Cloud-based solutions allows for ease for consumers and low operating costs for the company. Furthermore the company has great visibility of upto 90% of revenues for the next fiscal year.

For the year of 2014, HealthEquity posted sales of $62.0 million, a 34.6% improvement compared to the year before. The company posted a $7.1 million loss attributable to its common shareholders versus a $9.5 million profit the year before. Profitability in both years was very much impacted by one-time items as income from operations advanced from $7.1 million to $11.5 million over the past year.

Growth accelerated for the first quarter of the new fiscal year which ended in April of this year. Revenues of $20.2 million were up by 38.3% on an annual basis as net earnings of $2.7 million were about a million higher compared to the year before. The company ended the quarter with about 1.01 million HSA members after having an average of 992,000 members through the quarter. This results in average revenues per user of about $80 for the year if I annualized these numbers.

What should be noted is that the company "only" added about 40,000 users during the quarter. This compares to net additions of about 313,000 over the past twelve months. Total assets in those accounts have risen to about $1.7 billion.

Ahead of the offering the company held merely $14 million or so in cash and equivalents. Outstanding preferred stock will be converted into common stock upon the public offering. Of the $127 million in gross proceeds, some $50 million will be paid out in dividends ahead of the public offering. As such I forecast a net cash position of about $75 million following the offering.

Yet shares have risen to levels of about $17.50 following the offering, which values equity at some $860 million, or operating assets just below $800 million. This values equity at 10 times the current run rate in quarterly revenues and about 70-80 times GAAP earnings if the first quarter earnings are extrapolated for the current year.

Investment Thesis

As noted above, the public offering of HealthEquity has been a huge success. Shares were sold above the high end of the preliminary offering range. Shares ended their first day trading at $17.60 per share, trading some 60% above the midpoint of the preliminary offering range.

Despite the rapid growth and profitable state of the operations there are some risks of course as well for this recent offering. In my eyes it is notably changing legislation and perhaps intensifying competition from much larger and resourceful companies which can impact HealthEquity's future operations potentially. The reliance on distributors to sell the products creates some dependency risk as well, as does the fact that operations are run from the cloud, creating cyber security and privacy issues.

Yet there are large opportunities as well. For starters is a rapidly growing market, huge operating leverage in the business model with relatively low operating costs, and the fact that acquisition costs tend to decline on a relative basis as the customer bases increases. Fees based on assets under management will benefit from the accumulation of cash and new customers, with total assets under management already standing at $1.7 billion.

At the moment, the business has about a million customers generating average revenues of about $80 per user. If the business could have 5 million customers by 2010, with each of them generating average revenues of about $100, revenues of $500 million would be attainable. Assuming operating margins of 20%, earnings of about a $100 million would be achievable, making the business a real buy at current levels.

As such the deal has some real positive prospects in my eyes, yet unfortunately shares have already moved up some 60% from the midpoint of the preliminary offering range. While I could imagine shares trading at about $40-50 in the good scenario as outlined above, perhaps the chances are bigger that this scenario will not become a reality due to changing legislation or increased competition.

As such I would like to have a better risk-reward opportunity, being interesting in the shares in a $10-$15 range. I am not necessary a buyer after the momentum bandwagon. I will keep this interesting name on my radar for the moment, hoping to provide an update with the first quarterly earnings release as a publicly traded business.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.