Join Hedgeye's Healthcare team on August 17th at 11:00 AM ET to review their short thesis on HealthEquity (HQY).
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TOO CLOSE TO THE SUN; base case -30% downside
We first added HealthEquity as a short in February 2017 after a post-election rally drove shares +60% higher on prospects of health reform expanding the role of Health Savings Accounts (HSAs). Policy tailwinds notwithstanding (which have since diminished), we believe it will be difficult for HealthEquity to sustain > 20% sales growth in perpetuity with 53% of large* employers offering an HDHP/HSA option as of 2016. These large businesses represent 47% of private sector employment in the United States and 24% of covered employees. Our HSA adoption model projects annualized HSA account growth of 10-13% market-wide through 2020, a significant deceleration from the 23% CAGR from 2013-2016.
Additionally, low industry barriers to entry have been conducive to heightened competition and service account fee pricing pressure from Health Plans, who increasingly have in-sourced or diversified their Consumer Directed Health Plan (CDHP) offerings. In May 2017, HealthEquity's largest customer, Anthem (~8% of accounts), launched a new CDHP/HSA solution branded "Act Wise" as a competing option to HealthEquity. Prior to May 2017, HealthEquity was Anthem's preferred HSA administrator.
Given the prevailing growth narrative, we believe it will be difficult for the stock to hold its premium multiple (27x 2018 EBITDA / 71x 2018 EPS) in the face of slowing revenue growth due to a maturing market, higher attrition, and pricing pressure.
key presentation topics
- HDHP/HSA adoption model and trends by employer size
- Addressable market by employer size and health plan segment
- Market share by HSA Administrator and Health Plan
- Competitive environment, barriers to entry and pricing
- Barriers to HSA adoption (match, employer risk status, plan options)
- Macro drivers (interest rates, employment, savings rate, policy)
- HealthEquity HSA member attrition and customer acquisition costs
- HSAs as investment vehicles vs 401(k)
- Average account balance growth
- Valuation, sentiment, and catalysts
* > 500 Employees (2016 Mercer Survey)
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