The stock of HealthEquity (NAS:HQY, 30-year Financials) is believed to be significantly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $69.99 per share and the market cap of $5.8 billion, HealthEquity stock is estimated to be significantly undervalued. GF Value for HealthEquity is shown in the chart below.
Because HealthEquity is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth, which averaged 37.7% over the past three years and is estimated to grow 15.60% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. HealthEquity has a cash-to-debt ratio of 0.31, which which ranks worse than 66% of the companies in the industry of Healthcare Providers & Services. The overall financial strength of HealthEquity is 5 out of 10, which indicates that the financial strength of HealthEquity is fair. This is the debt and cash of HealthEquity over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. HealthEquity has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $733.6 million and earnings of $0.118 a share. Its operating margin is 10.91%, which ranks better than 75% of the companies in the industry of Healthcare Providers & Services. Overall, the profitability of HealthEquity is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of HealthEquity over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of HealthEquity is 37.7%, which ranks better than 93% of the companies in the industry of Healthcare Providers & Services. The 3-year average EBITDA growth rate is 22.8%, which ranks better than 72% of the companies in the industry of Healthcare Providers & Services.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, HealthEquity's return on invested capital is 7.19, and its cost of capital is 9.51. The historical ROIC vs WACC comparison of HealthEquity is shown below:
In conclusion, the stock of HealthEquity (NAS:HQY, 30-year Financials) is believed to be significantly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 72% of the companies in the industry of Healthcare Providers & Services. To learn more about HealthEquity stock, you can check out its 30-year Financials here.
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