These Analysts Like HealthEquity's Post-Q3 Story

HealthEquity Inc HQY outperformed third-quarter expectations with a 47-cent bottom-line more than double analyst forecasts. Revenue of $157.1 million also beat consensus estimates of $152.4 million, while EBITDA closed the quarter at $56 million against $43 million forecasts.

HealthyEquity's stock traded higher by 14% to $69.92 per share at time of writing.

First Takes

The Street liked HealthEquity’s metrics but was more enthused about the big-picture HealthEquity story.

“More importantly, the company provided favorable commentary on two key parts of the growth story: 1) end market demand for health savings account (HSAs); and 2) the performance of WAGE,” Bank of America analysts led by Allen Lutz emphasized in a report. “In our view, strong account growth in the quarter and a positive qualitative outlook for HSA demand is meaningful given the company’s historically conservative approach.”

HSA grew membership 21% and assets 24% to yield about 21% revenue growth.

“Higher cash yields on custodial assets helped,” KeyBanc analysts Donald Hooker and John Kim wrote. “However, management took a much more cautious tone on potential custodial cash yields next year due to recent declines in short-term rates. The favorable new IRS regulations released in July 2019 are noteworthy; however, management commented that these positive regulations will likely not impact HSA adoption in the near term.”

Meanwhile, HealthEquity also reported $15 million of run-rate acquisition cost synergies from its WageWorks purchase. It expects to achieve $50 million by the end of 2022.

“Regarding WAGE, revenue was at the top end of the guidance range and the synergy timeline has been accelerated, indicating that attrition levels are under control and the company is executing against its accretion targets,” Lutz wrote.

KeyBanc offered a more cynical take on WageWorks.

“Revenues at the acquired WageWorks businesses were down by ~6% y/y due to ongoing attrition associated with the FSA and COBRA business that was acquired by WageWorks in 2016 from Automatic Data Processing (ADP),” Hooker and Kim wrote. “There will likely be more revenue run-off here in the near term.”

Earnings Breakdown

Wells Fargo said WageWorks contributed most of the quarter’s revenue and EBITDA upside as lower HSA yields offset account growth in the core HealthEquity segment. However, KeyBanc suggested that a 4.4% year-over-year increase in consolidated revenues reflects high growth in legacy HealthEquity segments and decline in WageWorks segments.

“We estimate that pro forma combined EBITDA margins were down 30 [basis points year-over-year], reflecting the negative economies of scale on the lower revenues at legacy WageWorks, offset by acquisition cost synergies,” Hooker and Kim wrote.

Expert Focus

Bank of America expects strong account growth and WAGE performance to drive $527.4 million in 2020 revenue. However, it's watching industry growth rates for health savings plans as PPO plans surge and the Fed cuts interest rates. Wells Fargo suggested it's less concerned about interest rates.

“We would note that the percent of revenue that is interest rate sensitive has fallen from 55% prior to the WageWorks acquisition to 25% after,” analyst Jamie Stockton wrote.

The Ratings

• Bank of America maintained a Buy rating and $75 price target;
• KeyBanc Capital Markets maintained an Overweight rating but raised its target from $70 to $77;
• Wells Fargo maintained an Outperform rating and $76 target.

“HQY seems to be executing fairly well on the things it can control (new account additions and acquisition integration),” Stockton wrote. “While management’s commentary about cash yields in FY21 may temper some of the positive reaction around Q3 results, we suspect a better fundamental picture (albeit still declining) at WageWorks will be well received.”

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