HealthEquity: Strong Growth And Healthy Cash Flows Changed My Mind

seekingalpha05-29

Value investors often overlook growth opportunities, potentially missing out on upside, such as has been the case with HealthEquity.The firm has experienced rapid growth in revenue and cash flows, ...

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JJ Gouin/iStock via Getty Images One of the biggest risks to value investors is underappreciating growth opportunities. We become so fixated on the price that we pay for a company that we heavily discount how much value future growth could have on a firm. While this doesn't necessarily cause us to lose money, it can cause us to miss out on upside. A great example that I can point to in my own work involves HealthEquity (NASDAQ:HQY), a firm that operates as a provider of HSAs (health savings accounts) and other types CDBs (consumer directed benefits). A little over two years ago, in March of 2022, I wrote an article that took a rather neutral stance on HealthEquity. I lauded the company for its growth, with revenue and cash flows expanding at a nice pace. I stated that, in the long run, the firm would probably do quite well for itself. It would also do well for its investors. But because of how pricey the stock was, I could not rate it any more than a ‘hold’ to reflect my view that shares would likely perform more or less along the lines of the broader market for the foreseeable future. Since then, the firm has surprised me. While the S&P 500 is up 22.8%, shares of HealthEquity are up 50%. You would think that, with such a significant increase, I might be tempted to downgrade the company to a ‘sell’. But after looking at the business again and seeing how rapid growth remains, particularly from a cash flow perspective, I would argue that upgrading it to a soft ‘buy’ is logical at this time. Of course, this doesn't mean that the picture won’t change, either increasing my conviction for this upgrade or causing me to become more neutral again. When new data comes out, it's imperative that we factor that into our view of the investment in question. And it just so happens that, after the market closes on June 3rd, the management team at HealthEquity is expected to announce financial results covering the first quarter of the company's 2025 fiscal year. The current expectation is for a rather significant increase in profitability, driven by a nice move higher in revenue. If the company can exceed this guidance, I could become even more bullish. But the opposite could also end up being the case if the firm fails to live up to expectations. Rapid growth Author - SEC EDGAR Data Fundamentally speaking, HealthEquity has been doing quite well for itself. Back when I wrote about the company previously, we only had completed financial results for the 2021 fiscal year. Today, that data now extends through 2024. From 2022 to 2024, revenue for the business jumped by 32.1% from $756.6 million to $999.6 million. This move higher has been driven by a couple of factors. For starters, the number of HSAs managed to jump from 7.21 million to 8.69 million. That's an increase of 20.6% that was responsible for the total assets of the HSAs on the company’s platform expanding from $19.62 billion to $25.21 billion. We unfortunately did see a small decline in the number of CDBs from 7.19 million to 7.01 million. Management attributed this to a rather significant drop to 6.93 million in 2023 as the number of COBRA accounts dropped because of the migration of some of those to the firm’s current COBRA platform and because of a difference in how COBRA accounts were counted. Even so, this didn't stop the number of accounts from climbing from 14.40 million to 15.70 million. Author - SEC EDGAR Data The growth in revenue for the company was instrumental in improving the company's bottom line. During this three-year window, HealthEquity went from generating a net loss of $44.3 million to generating a profit of $55.7 million. Other profitability metrics improved as well. Operating cash flow jumped from $141 million to $242.8 million. If we adjust for changes in working capital, the rise was even more impressive from $139.4 million to $276 million. Meanwhile, EBITDA for the company shot up from $240.8 million to $369.2 million. Author - SEC EDGAR Data Certainly helping the company's growth plans is the fact that, on May 14th, management completed the acquisition of the BenefitWallet HSA portfolio owned by Conduent (CNDT). That added roughly 616,000 HSA members that have a combined $2.7 billion worth of HSA assets. 34% of the value of these assets, management said, are in the form of investments as opposed to cash. That finally brings the company to over 9 million HSA members, with over 16 million total accounts. Speaking of growth, when it comes to the 2025 fiscal year, management expects revenue of between $1.14 billion and $1.16 billion. At the midpoint, this would be about 15% above the $999.6 million generated in 2024. Management is also forecasting EBITDA of between $438 million and $458 million. If we use the midpoint there and assume that adjusted operating cash flow will rise at the same rate, we would expect a reading for 2025 of $334.9 million. Author - SEC EDGAR Data With these figures, valuing the company becomes fairly simple. In the chart above, you can see how the stock is priced using historical results from 2023 and 2024. You can also see how it is priced using the estimates that I mentioned already for 2025. Naturally, shares are getting cheaper year after year. This is because of the growth of the business. On a forward basis, I would typically say that the company looks more or less fairly valued. But when you consider how strong growth has been, particularly on the bottom line, I would argue that the company probably actually has a bit of upside potential to it. This doesn't mean that the picture can't change, either for the better or for the worse. As I mentioned already, after the market closes on June 3rd, management expects to announce financial results covering the first quarter of the 2025 fiscal year. In the table below, you can see what analysts are forecasting compared to historical results from the first quarter of 2024. The expectation at this time is for revenue of $277.6 million. That would be an increase of 13.6% over the $244.4 million generated one year earlier. Earnings per share, meanwhile, are expected to come in at around $0.20. That would be four times higher than the $0.05 per share generated the same time of 2024. This would translate to an increase in profits from $4.1 million up to $17.8 million. On an adjusted basis, earnings per share are expected to grow from $0.50 to $0.66. That would take adjusted profits from $42.8 million to $58.7 million. Author - SEC EDGAR Data To be perfectly honest with you, I am not a fan of adjusted earnings in this particular case. Companies have a great deal of flexibility for what they factor into these numbers. And management in this instance factors in stock-based compensation. In the first quarter of 2024, stock compensation was $18.2 million. In theory, if the company had not paid that in the form of stock, they would have had to pay it in the form of cash. Giving the company credit for this gets too close to looking at cash flow. And when that's the case, we may as well just look at cash flow instead. But I digress. In the aforementioned table, you can also see other profitability metrics. If history is any guide, these will almost certainly increase as well. Takeaway  I have learned a valuable lesson from HealthEquity. Over two years ago when I last wrote about the company, I clearly underestimated its growth potential. This resulted in a missed opportunity. Today, shares are not exactly cheap. However, the company is growing at a rather impressive pace. With earnings on the horizon, and cash flows growing nicely, I would say that further upside probably does still exist. Because of this, I have decided to upgrade the stock to a soft ‘buy’.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2439557529"}