HealthEquity (HQY) is an American health savings account (HSA) administrator. The company has recently made several acquisitions in expansion moves. For example, the company is acquiring 87,000 HSAs with $1.3 billion in assets from HealthSavings in a transaction it expects to complete in Fiscal Q1 2023.
The company recently paid $455 million to acquire fellow HSA custodian Further. The transaction added 580,000 accounts with $1.9 billion in assets to HealthEquity’s portfolio.
HealthEquity has also acquired Fifth Third Bank’s HSA portfolio, adding 157,000 accounts in the process. In 2019, HealthEquity acquired WageWorks and aims to achieve $80 million in synergies by the end of Fiscal 2022. It has already achieved $75 million in synergies.
For Fiscal Q3 2022 ended October 31, HealthEquity reported revenue of $180 million. That marked a modest increase from $179.4 million in the same quarter last year but missed the consensus estimate of $185.1 million. The company posted adjusted EPS of $0.35, which declined from $0.41 in the same quarter last year but met the consensus estimate.
With this in mind, we used TipRanks to take a look at the newly added risk factors for HealthEquity.
Risk Factors
According to the new TipRanks Risk Factors tool, HealthEquity’s main risk category is Finance and Corporate, representing 38% of the total 52 risks identified for the stock. Tech and Innovation and Legal and Regulatory are the next two major risk categories, each accounting for 17% of the total risks. HealthEquity recently updated its profile with three new Finance and Corporate risk factors.
The company informs investors that it carries substantial debt. It mentions the recent borrowing of $600 million through the offering of notes maturing in 2029 at a coupon rate of 4.50%. Further, HealthEquity has entered into a $1.35 billion credit agreement that covers a term loan and revolving credit facility. The company says it may borrow more in the future. But it cautions that it may be required to direct a large portion of its cash flow to debt service payments which would reduce the amount of cash available for investments and funding operations. Moreover, HealthEquity cautions that carrying a substantial amount of debt could make it vulnerable to economic downturns and place it at a competitive disadvantage compared to its less leveraged rivals.
HealthEquity tells investors that its credit agreements may limit its ability to raise future financing on favorable terms. Furthermore, the agreements come with certain restrictions on how the business should operate and require the company to maintain certain financial ratios. HealthEquity warns that failure to abide by the terms of the agreements could result in a default and enable lenders to proceed against the assets used as collateral for the borrowings.
The company informs investors that the success of the Further acquisition will depend on its ability to properly integrate it with its existing business. However, the integration process could run into challenges that may disrupt HealthEquity’s existing operations or cause the loss of key personnel. Therefore, HealthEquity cautions that it may not fully achieve the anticipated benefits of the acquisition, which could deal a blow to its financial condition and operating results.
The Finance and Corporate risk factor’s sector average is 57%, compared to HealthEquity’s 38%. HealthEquity’s stock has declined 36% year-to-date.
Analysts’ Take
Following HealthEquity’s earnings report, Raymond James analyst Charles Peters reiterated a Buy rating on HealthEquity stock but lowered the price target to $70 from $90. Peters’ reduced price target still suggests 57.55% upside potential. The analyst mentioned that the price target cut reflects near-term headwinds after the company lowered its Fiscal 2022 guidance.
Consensus among analysts is a Strong Buy based on 8 Buys and 2 Holds. The average HealthEquity price target of $63.67 implies 43.30% upside potential to current levels.
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