As HQY Falls, Some Investors May See Opportunity.

Standing out among the Street's worst performers today is HealthEquity, a health information services company whose shares slumped -3.3% to a price of $61.72, 24.14% below its average analyst target price of $81.36.

The average analyst rating for the stock is buy. HQY underperformed the S&P 500 index by -3.9% during today's morning session, but outpaced it by 19.9% over the last year with a return of 7.5%.

HealthEquity, Inc. provides technology-enabled services platforms to consumers and employers in the United States. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.

HealthEquity does not release its trailing 12 month P/E ratio since its earnings per share of $-0.66 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for HQY of -93.4. Based on the company's positive earnings guidance of $1.76, the stock has a forward P/E ratio of 35.1. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the healthcare sector has an average P/E ratio of 13.21, and the average for the S&P 500 is 15.97.

To better understand HQY’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.

HealthEquity’s PEG is 2.13, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.

To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on HQY's margins:

Date Reported Revenue ($) Cost of Revenue ($) Gross Margins (%) YoY Growth (%)
2022-01-31 756,556,000.0 332,850,000.0 56 -1.1
2021-01-31 733,570,000.0 318,236,000.0 56.62 -7.57
2020-01-31 531,993,000.0 206,084,000.0 61.26 -2.89
2019-01-31 287,243,000.0 106,050,000.0 63.08 n/a
  • Average gross margin: 59.2 %
  • Average gross margin growth rate: -3.9 %
  • Coefficient of variability (higher numbers indicating more instability): 5.9 %

We can see from the above that HealthEquity's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.

To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in HealthEquity's free cash flow, which was $132,087,000.00 as of its most recent annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, HQY is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 13.3% and has on average been $126,972,500.00.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Healthequity's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2.8, but is still below the average P/B ratio of the Healthcare sector, which stood at 4.07 as of the third quarter of 2022.

Since it has a negative P/E ratio, a lower P/B ratio than the sector average, and a steady stream of strong cash flows with an upwards trend, HealthEquity is likely fairly valued at today's prices. The company has mixed growth indicators because of an above average PEG ratio and consistently strong gross margins. We hope you enjoyed this overview of HQY's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.