HealthEquity shares retain Overweight rating, $100 target

On Wednesday, KeyBanc maintained its positive stance on HealthEquity, Inc (NASDAQ:HQY) with an Overweight rating and a steady $100.00 price target. The firm highlighted HealthEquity's potential for sustained strong performance in the coming years, despite possible challenges from a lower interest rate environment.

KeyBanc's confidence is based on three main factors: the growth of the company's enhanced rate portfolio, a significant portion of business still benefiting from higher pandemic-era yields, and improvements in margins due to digital and AI initiatives.

HealthEquity's enhanced rate portfolio, which currently comprises over 35% of the total book, is expected to increase to around 60% by 2027, according to KeyBanc. Additionally, the firm notes that a considerable amount of HealthEquity's business is still operating at yields of 1.5-2.0% from the time of the pandemic. These high-yield accounts are detailed in a bar chart found on page three of the analyst's report.

KeyBanc also points to the company's margin expansion as a result of digitization and artificial intelligence. With services gross margins surpassing 34% this quarter, the firm believes HealthEquity is only at the beginning stages of benefiting from these technological advancements. The company's execution of a new $300 million share repurchase program is anticipated to counterbalance any stock pressures from the potential lower interest rates.

Looking ahead, KeyBanc expects HealthEquity to continue growing its revenue by increasing its market share within the Health Savings Accounts (HSA) sector. This growth is expected to come both organically and through strategic acquisitions, supported by the company's robust cash generation capabilities.

The firm's valuation of HealthEquity's shares is based on trading approximately 7.5 times the FY26 revenue estimate and around 18 times the FY26 adjusted EBITDA estimate. KeyBanc notes that the company's shares are currently trading at about 15.5 times the next twelve months' enterprise value to adjusted EBITDA, which is a discount compared to its pre-WAGE multiple of 30-40 times. This valuation underscores the potential for share price appreciation and supports KeyBanc's Overweight rating.

In other recent news, HealthEquity Inc. reported impressive second-quarter results, with total revenue reaching $299.9 million, surpassing analyst consensus estimates. The company's adjusted EBITDA also saw a significant increase, reaching $128.3 million, exceeding projections.

Analyst firms including Deutsche Bank, BTIG, and BofA Securities responded positively to these results, adjusting their price targets for HealthEquity and maintaining a Buy rating.

HealthEquity's success was largely attributed to strength across its Service, Custodial, and Interchange segments. Notably, Custodial revenue experienced a significant year-over-year increase of 50%, climbing to $138.7 million. HealthEquity also saw a 15% increase in Health Savings Account (HSA) members, ending the quarter with 9.4 million individuals.

In response to the robust quarter, HealthEquity revised its full-year guidance for fiscal 2025 upwards for both revenue and adjusted EBITDA. The company also reported adjusted earnings of $0.86 per share, exceeding the projected $0.70 per share. Lastly, HealthEquity announced a $300 million share repurchase program, demonstrating confidence in its financial position and growth trajectory.

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