HealthEquity - Why The Panic Doesn't Make Sense

Summary

• HQY dropped 24% in the past few days along with the broader market sell-off due to the coronavirus panic.
• The company provided great Q4 performance and provided a strong growth guidance for FY2021.
• The outbreak doesn't cause any negative impact to HealthEquity's performance. It may increase interchange revenue, if the outbreak worsens in the near future.
• With growing adoption of HSA by millennials and Generation Z, the Long term growth thesis remains intact.

Introduction

HealthEquity (NASDAQ:HQY) dropped 24% from its recent high of $87.73 amidst the panic sell-off in the US stock market. This article aims to discuss the opportunity presented by this drop to long term investors.

Source: Google Finance

Coronavirus concerns

Fears of a global pandemic as a result of the coronavirus (COVID-19) outbreak have created a sharp sell-off in global stock markets. Many companies provided an assessment of potential negative impact on their outlook. In the US, the SP500 is down almost 13% from its all time high levels.

Source: Google Finance

I am not discounting the severity of the problem. Every life is precious. However, we are seeing large number of recoveries globally.

Source: Worldometer

Further, there appears some good news as we see the rate of increase of the no. of new cases and deaths to be slowing down.

Source: Worldometer

HSA makes the most sense at a time like this

In the US, coronavirus testing is free. However, there are other costs that a patient must bear such as treatments, medicines, hospital stay, etc. The amount a patient has to pay depends on their health insurance plans.

HSA offers the individuals the ability to save tax free dollars (up to $3550 for single and $7100 for a family) for qualified medical expenses. Further, HSA offers a triple tax advantage - Tax free contributions, Tax free investment of the HSA funds, TAX free withdrawals for qualified medical expenses.

Individuals with a HSA account could pay for these costs using their savings. Now, this may not be of use presently to individuals without HSA, but it is something they can consider for the future.

With 5.3 million HSA accounts and $11.5 Billion in assets, HealthEquity is a leading administrator of health savings accounts. A look into the current trend reveals that Americans are increasingly spending HSA dollars. Continued use of HSA funds benefits HealthEquity through increased interchange revenue (revenue earned by HealthEquity by use of the account holder's debit card).

Source: HealthEquity Investor Presentation

17% of HealthEquity's revenue comes from interchange revenue (prior to the WageWorks acquisition. This % will change based on the reported numbers in FY2020 10K). In my previous long term view articles about HealthEquity, I talked about custodial revenue (interest on cash balance as well as fees from investments) to be the key elements of HealthEquity's long term success story. This is because in recent times, we are seeing unprecedented growth in the investment of HSA assets. However, should coronavirus threat levels continue at current levels for longer, then interchange revenue could be higher in FY2021 than projected.

Source: Author's calculations

Reduction in interest rates by the federal government as a result of the coronavirus concern. However, HealthEquity has stabilized the custodial revenue from savings through long term contracts on the interest rates.

With respect to the interest rate for the legacy HealthEquity assets that we get generate the custodial revenue for the bulk of it. Those contracts are pretty well in place and we've given guidance to that number of what we expect the yield to be. And so that helps us stabilize that revenue source. - Darcy Mott, CFO, HealthEquity

A 24% drop in HQY stock as a result of the market panic doesn't make sense and in my opinion, this drop presents an excellent buying opportunity.

The Long Term View

Despite increased spending of HSA money, the average HSA balance was $2,803, according to data from the Employee Benefit Research Institute. That's up from the average balance of $1,991 in 2013.

Invested assets grew 71%YoY and this benefits HealthEquity since the company gains from the investment fees. The custodial revenue as a result of investments was up 49% in FY2020. In the long term view, I anticipate HSA account size to grow through periodic contributions and more account holders investing their balance.

Source: HealthEquity Press Release

Source: HealthEquity Investor Presentation

With increased awareness around the tax benefits and the need to manage rising healthcare costs, it is encouraging to see increased adoption of Health Savings Accounts by millennials and generation Z. As we think about the future, these generations will constitute the majority of the HSA asset size.

Source: CNBC Survey

Partly fueled by the WageWorks acquisition, HealthEquity has exceeded expectations and has beaten the 2019 guidance. Management expects FY2021 revenue to be in the range of $812 million to $820 million, representing a 53% increase YoY.

Conclusion

HealthEquity has beaten its guidance for 2019. For 2020, as a result of the completion of WageWorks acquisition, management has provided strong revenue growth guidance.

Amid stock market selloff due to the spread of coronavirus, there has been a big drop in HQY stock. While global metrics seem to be indicating a near end to the panic, in my opinion, HealthEquity will do well either way. At current price levels, I believe HealthEquity is a good investment for long term investors.

Analyst’s Disclosure: I am/we are long HQY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Value Ninja]

I believe the bigger threat to HQY, and perhaps a bigger influence on the shares than Covid-19, is the risk of a Sanders nomination and presidency.

Sanders, in theory, means Medicare For All, which effectively renders HSAs irrelevant.

But I think that is such an unlikely outcome, so the conclusion is the same. HQY has a very bright future.

And Biden's success yesterday should be a positive for the shares today.

[Hidden Opportunities]

Hi ValueNinja, thank you for taking the time to read my article.
Back in June 2019, I wrote my opinion on the future of HSA with Medicare-for-all concerns - seekingalpha.com/...
When you get a chance, please read my views. I would be interested in your thoughts.