Shares of HealthEquity (HQY) jumped 1.5 % during today's morning session, bringing their 52 week performance to 9.7%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company' growth prospects and market sentiment.
HealthEquity, Inc. provides technology-enabled services platforms to consumers and employers in the United States. The mid-cap Healthcare company is based in Draper, United States and has 3,688 full time employees.
HQY Has a Higher P/E Ratio Than the Sector Average
Compared to the Healthcare sector's average of 13.21, HealthEquity has a trailing twelve month price to earnings (P/E) ratio of -87.0 and an expected P/E ratio of 32.1. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $-0.66 or forward earnings per share of $1.79.
Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since HealthEquity's P/E ratio is higher than its sector average of 13.21, we can deduce that the market is overvaluing the company's earnings.
HealthEquity Is Fairly Valued in Terms of Expected Growth
Another factor pointing to HealthEquity's value is its PEG ratio of 1.54. This is the stock's price to earnings ratio divided by its estimated earnings growth rate. If the resulting ratio is near or lower than 1 -- but higher than 0 -- its indicates that the company is faitly valued in terms of expected growth.
HQY Has an Average P/B Ratio
Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.
Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For HealthEquity, the P/B value is 2.6 while the average for the Healthcare sector is 4.07.
HQY's Weak Cash Flow Generation Is Troubling
The table below shows that HealthEquity is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in HealthEquity's case, free cash flow is growing at an average rate of -32.3% with a coefficient of variability of 66.7%. We can also see that cash flows from operations are evolving at a 14.4% rate, versus 117.2%:
| Date Reported | Cash Flow from Operations ($ MM) | Capital expenditures ($ MM) | Free Cash Flow ($ MM) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-01-31 | 141 | -137 | 4 | -95.38 |
| 2021-01-31 | 182 | -97 | 85 | 34.51 |
| 2020-01-31 | 105 | -42 | 63 | -36.03 |
| 2019-01-31 | 113 | -15 | 98 | n/a |
HealthEquity's Is a Profitable Business
If you are looking to make HQY a long term investment, it's essential that you understand the viability of its business through a study of its margins. Gross margins tell you how much the company makes in profit when only the costs directly related to producing the goods or delivering the service are taken into account. Operating margins, on the other hand, factor in overhead costs so they tell you how effectively HealthEquity is run.
HealthEquity's Gross Margins
| Date Reported | Revenue ($ MM) | Cost of Revenue ($ MM) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-01-31 | 757 | 333 | 56 | -1.1 |
| 2021-01-31 | 734 | 318 | 56.62 | -7.57 |
| 2020-01-31 | 532 | 206 | 61.26 | -2.89 |
| 2019-01-31 | 287 | 106 | 63.08 | n/a |
HealthEquity's Operating Margins
| Date Reported | Total Revenue ($ MM) | Operating Expenses ($ MM) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-01-31 | 757 | 383 | 5.36 | -50.87 |
| 2021-01-31 | 734 | 335 | 10.91 | -46.81 |
| 2020-01-31 | 532 | 217 | 20.51 | -24.15 |
| 2019-01-31 | 287 | 104 | 27.04 | n/a |
HealthEquity's cost of revenue is growing at a rate of 51.1% in contrast to 59.4% for operating expenses. Sales revenues, on the other hand, have experienced a 42.1% growth rate. As a result, the average gross margins growth is -3.9 and the average operating margins growth rate is -40.6, with coefficients of variability of 5.9% and 60.7% respectively.
HealthEquity Benefits From Positive Market Signals
The market sentiment regarding HealthEquity is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $101 to $68. HQY is trading -30.6% away from its target price of $82.85. 4.3% of the company's shares are tied to short positions, and 103.4% of the shares are held by institutional investors.
| Holder | Shares | Date Reported | Percentage | Value |
|---|---|---|---|---|
| Blackrock Inc. | 9,690,500 | 2022-09-29 | 11% | $556,137,789 |
| Vanguard Group, Inc. (The) | 8,173,889 | 2022-09-29 | 10% | $469,099,484 |
| Wasatch Advisors Inc | 5,726,062 | 2022-09-29 | 7% | $328,618,694 |
| FMR, LLC | 3,983,836 | 2022-09-29 | 5% | $228,632,345 |
| William Blair Investment Management, LLC | 3,332,969 | 2022-09-29 | 4% | $191,279,088 |
| State Street Corporation | 2,671,946 | 2022-09-29 | 3% | $153,342,979 |
| JP Morgan Chase & Company | 2,151,210 | 2022-09-29 | 3% | $123,457,940 |
| Brown Advisory Inc. | 2,059,396 | 2022-09-29 | 2% | $118,188,735 |
| ArrowMark Colorado Holdings LLC | 1,983,563 | 2022-09-29 | 2% | $113,836,679 |
| Mackenzie Financial Corporation | 1,891,751 | 2022-09-29 | 2% | $108,567,588 |
