Health Plans Boosts HealthEquity

11/13/2015 8:00 am EST

Focus: STOCKS

Timothy Lutts

Publisher, Cabot Heritage Corporation

Recent months have been rough on drug stocks. But the one sector of the healthcare business that’s thriving is the part that involves the act of pushing paper around to determine who pays the bill, asserts Timothy Lutts, editor of Cabot Stock of the Month.

The Affordable Care Act has shuffled the deck a bit in the insurance market; there has been a growing demand for tax-advantaged healthcare plans like Flexible Spending Accounts and Health Savings Accounts.

These are all great plans, but they all need someone to administer them, which is where HealthEquity (HQY) comes in.

HealthEquity is one of the leading companies in this business, managing more than 1.5 million health savings accounts for 70 health plan partners and employees at approximately 27,000 companies across the US.

The company charges a small management fee for each account and those fees add up. In the latest quarter, 48% of revenues came from account fees, 30% came from custodial fees, and 22% came from card fees, which is the fastest-growing segment.

Founded in 2002, the company grew revenues 35% in 2014 and between 40% and 50% in each of the past four quarters.

And just recently, it announced that it would acquire 170,000 health savings accounts from The Bancorp, which is getting out of the business.

Earnings have been consistently positive and analysts are looking for earnings growth of 67% this year and 43% in 2016, so this is definitely a growth company.

Yet it’s also a conservative company, because the business model is so much like that of those insurance companies that have dominated healthcare in recent decades: collect money and grow it, while charging fees.

The difference is that, unlike insurance companies, HealthEquity has no risk of unexpected losses.

As to the stock, it came public in July 2014 at $14 and has been in a generally upward trend since, marked by a few major corrections.

Most recently, we saw the late-August market panic take the stock down to $25. I feel confident buying here, with downside limited and upside not.

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