HealthEquity, Inc. (HQY) is scheduled to report its fourth-quarter and full-year results on March 19. Wall Street expects the company’s fourth-quarter EPS and revenue to increase 57.7% and 10.7% year-over-year to $0.58 and $258.90 million, respectively. In this piece, I have discussed why it could be wise to wait for a better entry point in the stock despite the expected rise in revenue and earnings.

HQY has a stellar earnings history, having beaten the consensus EPS estimate in each of the trailing four quarters. For the fiscal year ended January 31, 2024, HQY revised its outlook, with revenue expected between $995 million to $1 billion. The company’s non-GAAP net income and EPS are now expected to be between $191 million and $195 million and between $2.20 and $2.24, respectively.

Its adjusted EBITDA is now expected to be between $364 million and $369 million. As of January 31, 2024, its total number of HSAs rose 9% year over year to 8.69 million. Its Total Accounts rose 5% year-over-year to 15.70 million, and HSA Assets grew 14% year-over-year to $25.21 billion. HQY’s stock has declined 0.2% over the past month and gained 46.1% over the past year to close the last trading session at $81.44.

Here’s what you might want to consider ahead of its upcoming earnings release:

Strategic Acquisition

On September 19, 2023, HQY and Conduent Incorporated announced that they had entered into a definitive agreement to transfer Benefit Wallet’s Health Savings Account (HSA) portfolio to HealthEquity. Approximately 665,000 customer accounts and $2.7 billion of BenefitWallet's HSA assets will be transferred to HealthEquity.

The transfer of BenefitWallet HSA assets to HQY is expected to close in multiple tranches during the first half of 2024, subject to regulatory and other conditions.

Robust Financials

HQY’s total revenue for the third quarter ended October 31, 2023, increased 15.3% year-over-year to $249.22 million. Its income from operations rose 457.4% over the prior-year quarter to $30.89 million. The company’s adjusted EBITDA increased 30.4% year-over-year to $95.65 million.

Also, its non-GAAP net income increased 61% over the year-ago quarter to $52.18 million. In addition, its non-GAAP EPS came in at $0.60, representing an increase of 57.9% year-over-year.

Commenting on its third quarter performance, HQY’s President and CEO Jon Kessler said, “Team Purple delivered another quarter of year-over-year double-digit revenue growth plus margin expansion. Our outlook reflects our ability to sustain that trend by remaining focused, together with our partners and clients, on the needs of the healthcare consumer.”

Favorable Analyst Estimates

Analysts expect HQY’s EPS for fiscal 2024 and 2025 to increase 62.4% and 28.2% year-over-year to $2.21 and $2.83, respectively. Its revenue for fiscal 2024 and 2025 is expected to increase 15.6% and 15.7% year-over-year to $995.78 million and $1.15 billion, respectively.

Stretched Valuation

In terms of forward EV/EBITDA, HQY’s 21.07x is 61.1% higher than the industry average of 13.08x. Likewise, its 7.62x forward EV/Sales is 108.5% higher than the industry average of 3.65x. Its 36.87x forward non-GAAP P/E is 84.8% higher than the industry average of 19.95x.

Mixed Profitability

In terms of the trailing-12-month net income margin, HQY’s 3% compares to the negative 4.78% industry average. Likewise, its 26.87% trailing-12-month EBITDA margin is 379.8% higher than the industry average of 5.60%. Furthermore, the stock’s 20.62% trailing-12-month levered FCF margin is significantly higher than the industry average of 0.78%.

HQY’s 0.16% trailing-12-month Capex / Sales is 96.1% lower than the 4.06% industry average. Likewise, its 0.32x trailing-12-month asset turnover ratio is 19.8% lower than the 0.39x industry average. Furthermore, the stock’s 0.94% trailing-12-month Return on Total Assets compares to the negative industry average of 30.60%.

POWR Ratings Reflect Uncertainty

HQY has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. HQY has a C grade for Quality, consistent with its mixed profitability. It has a D grade for Value, which is in sync with its stretched valuation.

HQY’s stock is trading below its 10-day moving average but above its 200-day moving average, justifying its C grade for Momentum.

HQY is ranked #7 out of 11 stocks in the Medical – Health Insurance industry. Click here to access HQY’s Growth, Stability, and Sentiment ratings.

Bottom Line

HQY has guided for a strong end to the fourth quarter, with sales growth driven by higher yield on HSA cash. This helped the company raise and narrow its fiscal 2024 guidance. The company also maintained its fiscal 2025 outlook, which is based on an estimated average HSA cash yield of about 3%.

However, its yield might face a minor headwind from its client-held funds. HQY seeks to double its non-GAAP net income per share over the next three fiscal years as HSA cash yields continue to rise and margins continue to expand. Furthermore, HQY will benefit from the acquisition of BenefitWallet’s HSA portfolio, which is expected to close in fiscal 2025. The acquisition's positive impacts are expected to start by the second quarter of fiscal 2025.

Despite HQY’s solid growth prospects, the stock trades at an expensive valuation. Given its mixed profitability and momentum, it could be wise to wait for a better entry point in the stock.

How Does HealthEquity, Inc. (HQY) Stack Up Against Its Peers?

HQY has an overall POWR Rating of C, which equates to a Neutral rating. You may check out these A and B-rated stocks within the Medical – Health Insurance industry: The Cigna Group (CI), Centene Corporation (CNC), and Molina Healthcare, Inc. (MOH). To explore more Buy-rated Medical – Health Insurance stocks, click here.

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HQY shares rose $0.55 (+0.68%) in premarket trading Monday. Year-to-date, HQY has gained 22.84%, versus a 7.26% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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