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Bull of the Day: WageWorks (WAGE)

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Looking for a company that could benefit from the Affordable Care Act? Consider WageWorks (WAGE - Free Report) , a $1.7 billion provider of benefits administration for corporations.

WAGE administers and operates an array of "consumer-directed benefit" solutions (CDBs), including spending account management programs, such as health and dependent care flexible spending accounts, health savings accounts, health reimbursement arrangements and commuter benefits, such as transit and parking programs.

While analysts are optimistic about WAGE's prospects in the new healthcare exchange environment, the stock has run pretty far this year to capture that sentiment, as you can see in the chart below which shows a solid 3-bagger.

The Healthcare Exchange Opportunity

WageWorks has a partnership with one of the most well-known private employee exchanges, Towers Watson. Towers has said its active employee exchange, which has recently been formed, will add two employers with 40,000 employees on January 1, 2014, along with its own employees. We believe it is possible Towers will add several hundred thousand employees in 2015 and many more in subsequent years.

Analysts at William Blair believe "there are many other companies considering private healthcare exchanges and we believe that WageWorks is having conversations with several current and potential industry participants."

Consulting firm Accenture (ACN - Free Report) aggressively forecasts that there will be 40 million active employees in healthcare exchanges by 2018, up from 1 million in 2014. WageWorks has about 10% market share in consumer-directed healthcare benefits today with 2.1 million customers.

Again from Blair...

"Assuming Accenture is too aggressive by half, and that WageWorks maintains its industry market share (its market share has been increasing significantly), WageWorks could add 2 million new employees by 2018. That would double its current base of clients and, assuming historical economics, could add $120 million of revenue (approximately $60/account/year) and as much as $60 million of EBITDA."

Growing Into Its Multiple

This is not a cheap stock by any means, trading over 60X 2014 estimates. But the earnings growth is there as you can see in the table below. And if the opportunities described above should develop, this EPS trajectory looks set to continue because the estimates here do not account yet for this growth potential.

Also note that we currently only have 2 analysts providing estimates for WAGE. Therein also lies opportunity as other Wall Street houses initiate coverage and give us a broader view of the investment potential. With a string of earnings beats behind it averaging 22% for the last four quarters, WAGE should be coming up on more analyst radars.

The other growth factor in WAGE's favor is acquisitions. The company looks to complete one to three deals per year in a very fragmented industry. There are several hundred small companies in the consumer-directed tax advantaged benefit account industry with between $5 million and $25 million of revenue.

Now that WAGE is on your radar, keep an eye on the earnings estimate revisions because they will tell you when these growth factors are kicking in and could benefit your portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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