The market-wide sell-off in equities during the fourth quarter has disproportionally impacted growth stocks that possess high price-to-earnings multiples translating into rich valuations. The market appears to have lost its appetite for the high growth and steep valuation equities that had huge upward moves throughout this record-setting bull market. HealthEquity Inc. (HQY) continues to post quarter after double-digit quarter growth in revenue and EPS and has been rewarded with a rich valuation as a function of its impressive growth. This high price-to-earnings multiple may be in jeopardy as the market moves into a risk-averse environment. As high-flying equities come down in the broader market sell-off, Health Equity may come down as a result and erase some of its monster gains that were witnessed in 2018. To be clear, Health Equity is an intermediary servicing the secular growth Health Savings Account (HSA) space that’s largely independent of legislative actions, drug pricing, rising insurance costs and not playing any role in the pharmaceutical supply chain. HealthEquity manages funds allocated for medical, dental and vision expenses that are deducted on a pre-tax basis and deposited into a dedicated HSA account. The company blew out the numbers when it reported its Q3 FY19 results and beat on both the top and bottom line.
HealthEquity manages $7.1 billion in assets across 3.7 million accounts against a potential market maturity of $1 trillion in assets across 50-60 million accounts. The durability of this growth has a long runway due to the secular growth in the HSA market. The company is sitting on largely untapped revenue sources where the vast majority of account holders have yet to invest any HSA money in investment offerings. Expanding margins for greater profitability is also unfolding as the older the account, the greater the gross margins. HealthEquity is currently sitting on a healthy balance sheet with $330 million in cash and cash equivalents with no debt. The company is posting accelerating revenue, cash flow, margin expansion and income growth with a strong balance sheet. I feel that HealthEquity will continue to post strong growth as it services the double-digit HSA growth market and manages more assets, accounts, and investments within these accounts. HealthEquity may be a great long-term investment in the healthcare space that’s independent of the health insurances, pharmaceutical supply chain companies, drug makers or pharmacies. Previously, I warned that the “current valuation is rich in an already frothy market thus caution at these levels is wise” and now it appears this heeding was responsible as the stock has sold off from $101 to $74 shedding 26% of its market value during the fourth quarter. Health Equity looks compelling after this healthy correction as the long-term narrative remains intact. Continue reading "HealthEquity Inc. - Rich Valuation Concerns?"