HealthEquity: A Trading Vehicle Performing As Expected, Strong Growth Hard To Ignore (HQY)

There are reasons to like HealthEquity, Inc. (NASDAQ:HQY). We have previously outlined several winning trades for the public on this stock. Here we are struggling to break out much above $80 for months. Now, each time the stock looks set to break out, it tends to reverse. That does not guarantee this will happen, but history suggests it is wise to take something off the table here if you still hold a full or near full position since our last trade.

One suggestion is to back out your original investment, with some profit, and let the rest run as a house position as a long-term investment. This is a key approach we use at our investing group. Now that said, the company just reported Q1 earnings which we will discuss in this column.

While this stock is great for traders, it can work as an investment long-term if management continues to execute. The company has a large total addressable market in the healthcare savings field. The company helps to provide HSAs, HRAs, and FSAs, which can help accompany a traditional health insurance plan by providing savings for non-covered medical expenses, like co-pays, medications, medical supplies, etc. Most of these consumer HSAs and HRAs are offered by traditional health insurance providers, but the monetization of these plans comes from the custodial assets. Over the years that we have been covering the company, HealthEquity has expanded its offerings, brought in new assets, and grown its plan memberships.

HealthEquity reported solid Q1 results. Revenue beat versus consensus estimates and the bottom line earnings per share also were a sizable beat. The quant growth grades are strong, but valuation-wise, the stock is getting priced to perfection. Seeking Alpha’s Quant valuations suggests the stock is pricey, with a grade of “F” on valuation metrics. The PEG ratio remains one of the few attractive components to the valuation, at 1.4x on a FWD basis. The price to cash flow at 29X FWD is really high here, while the EV/EBIT numbers on an FWD basis are 46X. And on a simple FWD EPS basis, nearly 30X is a lot to pay.

However, if the growth keeps up, then this valuation is relatively appropriate in this current market. A bad quarter, however, could send shockwaves, so be on alert. Overall, we continue to rate the stock a ‘hold’ overall, especially at these levels.

But for now, the growth is strong. The top line hit $287.6 million. This was an increase of 17.7% compared to $244.4 million last year. This was also a beat by $9 million versus estimates. The company reported service revenue of $118.2 million, custodial revenue of $121.6 million, and interchange revenue of $47.7 million, all growing from last year. Adjusted EBITDA was $117.4 million, an increase of 36% from last year.

We like the expense control here. Net income expanded to $28.8 million, or $0.33 per share, while adjusted net income was $70.3 million, or $0.80 per share. Folks, this is a huge increase from $42.8 million, or $0.50 per share a year ago. This is why the stock has broken above to a new trading range, but is still struggling to get much higher, breaking out of its range, or at least attempting to. As we stated in our coverage last year:

If the company can continue to grow EPS like this, then we could possibly see the stock finally bust out of the upper end of the trading range”

It would seem management has executed this challenge, as much of these results were driven by more accounts under management. Total HSAs were 9.1 million, an increase of 13% year-over-year, including 665,000 HSAs with investments, an increase of 20% year-over-year. Total accounts reached 16.0 million. The total HSA assets rose 22% to $27.3 billion from last year. The company also recently acquired “BenefitWallet” and their HSA portfolio from Conduent Business Services, which contributed to much of the asset gains.

For this fiscal year, management sees revenue of $$1.17 billion and net income between $90 million and $105 million, with adjusted EPS of $2.93 to $3.10 and adjusted EBITDA of $454 million to $474 million. For an early look to fiscal 2025, management is projecting revenues will be up about 16% or so to $1.15 billion with Adjusted EBITDA of approximately $435-$445 million. This is an outstanding outlook. Of course, in our last coverage, we also stated:

We suspect it will be difficult for shares to get much past $80, and so that is where we remain sellers of the stock… We as traders are buyers of HealthEquity, Inc. stock… buying in the $60s and selling in the $70s.

So far, that range played out to perfection. We believe, however, that backing out the initial investment if you have not done so and letting a house position run is wise to consider. HealthEquity, Inc.’s top and bottom line growth is impressive, as is the cash flow. A dividend is possible here as well with these earnings and cash flows, though we suspect debt repayment will take precedence first.