Here's Why You Should Hold On To HealthEquity (HQY) For Now

HealthEquity, Inc. (NASDAQ:HQY) is likely to gain from strong third-quarter fiscal 2020 results and a raised guidance. However, significant decline in margins raises concern.

In a year’s time, shares of HealthEquity have declined 26.7% compared with the industry’s 21.1% fall. Meanwhile, the S&P 500 Index has risen 16.9%.

With a market capitalization of $4.35 billion, HealthEquity provides integrated solutions for health-care account management, health reimbursement arrangement and flexible spending accounts for health plans, insurance companies and third-party administrators in the United States. The company’s earnings are anticipated to grow 25% over the next five years. For the trailing four quarters, the company has a positive earnings surprise of 21%, on average.

Let’s take a closer look at the factors that substantiate HealthEquity’s Zacks Rank #3 (Hold).

Factors Working in Favor

In the recently reported third quarter of fiscal 2020, HealthEquity reported adjusted earnings per share (EPS) of 47 cents, which improved a significant 51.6% on a year-over-year basis.

Revenues totaled $157.1 million, up 122.9% year over year.

Notably, the company gained on the back of the total number of Health Savings Accounts (HSA), which was 5 million, up 37% year over year. Additionally, total Active HSA members were 4.1 million, up 38% year over year.

Core segments — Service Revenues, Custodial Revenues and Interchange Revenues — also saw significant year-over-year improvement in the quarter.

Reflective of these, HealthEquity raised its revenue guidance for fiscal 2020.

The company now expects revenues between $520 million and $526 million, much higher than the earlier projected range of $341-$347 million.

Adjusted net income is projected between $101 million and $105 million, much above the earlier stated range of $76-$80 million. Adjusted EPS for fiscal 2020 is expected within $1.46-$1.52, compared to the range of $1.10-$1.16 provided earlier.

Factors Deterring the Stock

In the fiscal third quarter, HealthEquity’s gross margin was 61.1% of net revenues, down 390 basis points (bps) year over year.

Operating income in the fiscal third quarter was $9.9 million, down 47.7% year over year. Operating margin totaled 6.3% in the quarter, down significantly from the year-ago quarter’s 26.9%.

HealthEquity faces stiff competition from top HSA custodians like Alliant Credit Union and Bank of America (NYSE:BAC) in the United States.

Which Way Are Estimates Headed?

For fiscal 2020, the Zacks Consensus Estimate for revenues is pegged at $516.8 million, indicating an improvement of 79.9% from the year-ago reported figure. For adjusted earnings, the same stands at $1.22 per share, suggesting growth of 2.5% from the year-ago reported figure.

Stocks to Consider

Some better-ranked stocks from the broader medical space are Conmed Corporation (NASDAQ:CNMD) , Cardinal Health, Inc. (NYSE:CAH) and Thermo Fisher Scientific (NYSE:TMO) , each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Conmed has a long-term earnings growth rate of 17%.

Cardinal Health has a long-term earnings growth rate of 6.2%.

Thermo Fisher’s has a long-term earnings growth rate of 12.5%.

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