HealthEquity: Quality Firm, But Not Likely Worth The Price

Summary

• HealthEquity continues to grow, and it has demonstrated its ability to generate strong and growing cash flows over time.
• Long-term, the company will probably do quite well for investors, but this doesn't make it a great prospect.
• Shares are pricey and are, likely, fairly valued at best at this point in time.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

9dreamstudio/iStock via Getty Images

When investors think about the health care space, their minds often turn to the companies that own hospitals or to the pharmaceutical companies or to the health care providers. But one area often overlooked involves the HSA, or Health Savings Account. Health Savings Accounts allow workers to set aside money on a pre-tax basis in order to use those funds for healthcare purposes. They are a major tool for millions of Americans that, at the end of the day, help to reduce the burden of America's costly healthcare system. And one company that is dedicated to providing this kind of offering, not to mention other services, is HealthEquity (NASDAQ:HQY). Over the past few years, the company has exhibited tremendous growth. That growth has continued into the current fiscal year. However, cash flows have been very attractive for the past few years and have been growing alongside revenue. Ultimately, HealthEquity appears to be a high-quality company for investors to consider. But this does not mean that it makes for a great investment prospect. Shares today do look rather pricey and are, at best, fairly valued. More likely than not, they might actually be overpriced to some degree.

A play on healthcare spending

HealthEquity is a diversified provider of various medical offerings and technologies. The core of the company's offerings is the HSA. Based on data covering the final quarter of the company's 2022 fiscal year, it administers nearly 7.21 million HSA accounts worth a combined $19.62 billion. This is up from 5.78 million accounts the company had one year earlier that had a combined value of $14.34 billion. Management has not provided market share data covering the latest fiscal year. But they did say in their most recent annual report that their market share expanded from 4% in 2010 to 16% by the end of 2020. That number is very likely higher today.

In addition to managing HSAs, the company also has another type of account that it oversees called a CDB, or consumer-directed benefits plan. These are offered by employers and include flexible spending accounts and health reimbursement arrangements. At present, the company has 7.19 million of these in its portfolio, up from the 7.03 million it had one year earlier. This brings the total number of accounts the company has to 14.40 million, compared to the 12.81 million it had 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, look at different treatment options and prices, receive personalized benefit and clinical information, earn various wellness incentives, grow their savings, and even make other investment choices. Much of this functionality came as a result of the company's acquisition of WageWorks in 2019, a deal valued at about $2 billion. In addition to all of this, the company also offers a mutual fund investment platform and provides access to an online-only automated investment advisory service that it makes available to all of its members whose account balances exceed a certain set threshold. Other miscellaneous offerings include COBRA continuation services to employ your clients, health reimbursement arrangements, and even commuter programs that offer their users special pre-tax treatments.

Author - SEC EDGAR Data

Over the past few years, management has done well to grow the business. Although organic growth has taken place, much of this expansion was attributable to its acquisition activities. Between 2018 and 2021, for instance, the company saw revenue climb from $229.5 million to $733.6 million. Official financial results have not been provided for the 2022 fiscal year. But the company has said that revenue should range from between $754 million and $756 million. At the midpoint, this would imply a year-over-year growth rate of 2.9%.

When it comes to profitability, the picture has been a bit more volatile. Net income has been all over the map but has been consistently positive for the past few years. What is really exciting, however, has been operating cash flow. Between 2018 and 2020, this number increased from $81.7 million to $181.6 million. Over that same window of time, EBITDA has followed a similar trend, rising from $84.7 million to $240.8 million. Management has provided guidance for the 2022 fiscal year. Based on the data provided, EBITDA should 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 should be between $108 million and $110 million.

Author - SEC EDGAR Data

Taking this data, we can effectively price the company. On a price to adjusted earnings basis, the multiple of the company looks to be about 40. The price to operating cash flow multiple is substantially lower but still lofty, coming in at 24.8. And the EV to EBITDA multiple of the company should be about 19.9. Truth be told, these levels are quite lofty no matter how you look at them. And this is true even if you look at them relative to other similar firms. On a price-to-earnings basis, the five firms that I identified as being most similar to HealthEquity had a range of between 17.9 and 35.8. Using the price to operating cash flow approach, the range was 8.4 to 23.2. And looking at the pictures of the lens of the EV to EBITDA multiple would give a range of 11.1 to 17.1. In all three cases, HealthEquity was the most expensive of the group. Though it is worth mentioning that these comparable firms are all substantially larger than our prospect. The smallest of them, by market capitalization, is over four times its size. And the largest is almost 101 times its size. Higher trading multiples can be assigned to smaller companies if investors are anticipating rapid growth for an extended period of time. So that expectation may be driving some of this disparity and might be warranted if growth continues.

Company	Price / Earnings	Price / Operating Cash Flow	EV / EBITDA
HealthEquity	40.0	24.8	19.9
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
Humana (HUM)	18.3	23.7	N/A

Click to enlarge

Takeaway

Based on the data provided, HealthEquity seems to be an interesting company that has an interesting future for it. I suspect, for the long run, the business will fare quite well. But that does not mean that it represents a strong opportunity at this time. I would say that the high price shares are trading for probably are not warranted, even if we assume rapid growth will resume after the 2022 fiscal year. At best, shares might be closer to fairly valued. But at the end of the day, none of this changes the fact that shares are not cheap enough to make for a compelling opportunity at this time. For that reason alone, I do think investors might be better off looking elsewhere for opportunities if they want strong returns as part of their investment outcome.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.