Tuesday, BofA Securities updated its outlook on HealthEquity, Inc (NASDAQ:HQY), raising the price target to $105 from the previous $97, while maintaining a Buy rating on the stock.
"HealthEquity kicked off FY25 with a strong quarter with custodial revenue meaningfully outpacing BofA/ST estimates. The biggest takeaway is that HealthEquity is driving margin expansion in several ways and this is likely to continue for the foreseeable future," said the analysts.
HealthEquity's first-quarter performance showcased a substantial 150 basis point improvement in service costs, not including a one-time $2.5 million adjustment. This improvement was attributed in part to the company's investments in automation.
Additionally, a 230 basis point enhancement in Technology & Development was noted, although costs in this area are expected to increase slightly as the year progresses. The firm anticipates interchange margins will improve as HealthEquity transitions from using two card processors to one.
HealthEquity's acquisition strategy also contributes to its margin improvement, as it focuses on acquiring accounts without the associated operating expenses, leading to high incremental returns on mergers and acquisitions.
HealthEquity has also provided updated guidance that seems conservative considering its strong quarterly performance. The guidance accounts for additional BenefitWallet accounts expected to be added in the second quarter and a solid outlook for interest rates. BofA Securities sees HealthEquity as possessing the most stable operating model in the healthcare IT sector.
The revised price objective reflects a slight increase in the multiple from approximately 21.0 times CY24E EV/EBITDA to around 21.5 times CY24E EV/EBITDA, representing BofA's heightened confidence in the company's potential to exceed financial expectations. The firm's endorsement reiterates its positive stance on HealthEquity's shares.
In other recent news, Baird, in response to these strong results, raised the price target for HealthEquity to $104, maintaining an Outperform rating on the stock. The company's gross margin has seen a significant increase, reflecting efficient operations and strategic service delivery.
In other recent developments, HealthEquity plans to settle the debt from the BenefitWallet acquisition using operational cash in the upcoming quarters. The company is also implementing strategies to transition members from cash accounts to investment accounts and introducing digital wallet features to improve efficiency. These are the latest highlights in HealthEquity's journey in the expanding HSA market.
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