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Here's Why You Should Hold on to HealthEquity (HQY) for Now

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HealthEquity, Inc. (HQY - Free Report) is likely to gain from strong third-quarter fiscal 2020 results and a raised guidance. However, significant decline in margins raises concern.

In a year’s time, shares of HealthEquity have declined 26.7% compared with the industry’s 21.1% fall. Meanwhile, the S&P 500 Index has risen 16.9%.

With a market capitalization of $4.35 billion, HealthEquity provides integrated solutions for health-care account management, health reimbursement arrangement and flexible spending accounts for health plans, insurance companies and third-party administrators in the United States. The company’s earnings are anticipated to grow 25% over the next five years. For the trailing four quarters, the company has a positive earnings surprise of 21%, on average.

Let’s take a closer look at the factors that substantiate HealthEquity’s Zacks Rank #3 (Hold).

Factors Working in Favor

In the recently reported third quarter of fiscal 2020, HealthEquity reported adjusted earnings per share (EPS) of 47 cents, which improved a significant 51.6% on a year-over-year basis.

Revenues totaled $157.1 million, up 122.9% year over year.

Notably, the company gained on the back of the total number of Health Savings Accounts (HSA), which was 5 million, up 37% year over year. Additionally, total Active HSA members were 4.1 million, up 38% year over year.

Core segments — Service Revenues, Custodial Revenues and Interchange Revenues — also saw significant year-over-year improvement in the quarter.

Reflective of these, HealthEquity raised its revenue guidance for fiscal 2020.

The company now expects revenues between $520 million and $526 million, much higher than the earlier projected range of $341-$347 million.

Adjusted net income is projected between $101 million and $105 million, much above the earlier stated range of $76-$80 million. Adjusted EPS for fiscal 2020 is expected within $1.46-$1.52, compared to the range of $1.10-$1.16 provided earlier.

Factors Deterring the Stock

In the fiscal third quarter, HealthEquity’s gross margin was 61.1% of net revenues, down 390 basis points (bps) year over year.

Operating income in the fiscal third quarter was $9.9 million, down 47.7% year over year. Operating margin totaled 6.3% in the quarter, down significantly from the year-ago quarter’s 26.9%.

HealthEquity faces stiff competition from top HSA custodians like Alliant Credit Union and Bank of America in the United States.

Which Way Are Estimates Headed?

For fiscal 2020, the Zacks Consensus Estimate for revenues is pegged at $516.8 million, indicating an improvement of 79.9% from the year-ago reported figure. For adjusted earnings, the same stands at $1.22 per share, suggesting growth of 2.5% from the year-ago reported figure.

Stocks to Consider

Some better-ranked stocks from the broader medical space are Conmed Corporation (CNMD - Free Report) , Cardinal Health, Inc. (CAH - Free Report) and Thermo Fisher Scientific (TMO - Free Report) , each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Conmed has a long-term earnings growth rate of 17%.

Cardinal Health has a long-term earnings growth rate of 6.2%.

Thermo Fisher’s has a long-term earnings growth rate of 12.5%.

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