Rising investments, consistent breakthroughs, and an aging population should keep driving the healthcare sector’s growth. The global consumer healthcare market is expected to grow at a 21.7% CAGR to $932.74 billion by 2026.
Investors’ interest in this space is evident from the SPDR S&P Health Care Services ETF’s (XHS) 9.4% gains over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 1.4% loss. Inelastic demand for healthcare products and services should help the sector survive the economic and market headwinds well in the upcoming months. So, Humana Inc. (HUM) and HealthEquity, Inc. (HQY) should stay afloat.
HUM offers commercial fully-insured medical and specialty health insurance benefits, coordinated health care through health maintenance organizations (HMO), point-of-service plans, and administrative services products to employer groups, government-sponsored plans, and individuals.
On the other hand, HQY provides technology-enabled services platforms that allow consumers to make healthcare saving and spending decisions. It allows consumers to access their tax-advantaged healthcare savings, compare treatment options, pay healthcare bills, receive personalized benefits and clinical information, and earn wellness incentives.
While HQY lost 11.8% over the past month, HUM surged 7.7%. HUM is a clear winner with 6.1% gains over the past nine months versus HQY’s 13.2% loss. But which stock is a better buy now? Let’s find out.
Recent Financial Results
For its fiscal 2022 first quarter ended April 30, 2022, HUM’s total revenues increased 16% year-over-year to $23.97 billion. The company’s income from operations came in at $1.29 billion, representing a 5.4% rise from the prior-year period.
While its net income increased 12.3% year-over-year to $930 million, its adjusted EPS grew 4.8% to $8.04. As of March 31, 2022, the company had $4.86 billion in cash and cash equivalents.
For the fiscal 2022 first quarter ended April 30, 2022, HQY’s total revenue increased 11.7% year-over-year to $205.68 million. The company’s gross profit came in at $111.17 million, representing a 7.8% year-over-year decline. Its loss from operations came in at $7.29 million versus an operating income of $4.25 million in the year-ago period.
HQY’s non-GAAP net income came in at $22.67 million, down 26.8% from the prior-year period. Its non-GAAP EPS decreased 29% year-over-year to $0.27. As of April 30, 2022, the company had $161.25 million in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, HUM’s EBIT has increased at a CAGR of 10.9%. Analysts expect HUM’s EPS to grow 19.3% in fiscal 2022, ending December 31, 2022, and 12.2% in fiscal 2023. The company’s revenue is expected to grow 11.7% year-over-year in fiscal 2022 and 8.6% in fiscal 2023. Its EPS is expected to grow at 14.2% per annum over the next five years.
Over the past three years, HQY’s EBIT has declined at a CAGR of 29.7%. HQY’s EPS is expected to decrease 3.8% year-over-year in fiscal 2022, ending January 31, 2023, and rise 31.3% in fiscal 2023. The company’s revenue is expected to grow 9.9% year-over-year in fiscal 2022 and 10.4% in fiscal 2023. Its EPS is expected to grow at a 15.7% rate per annum over the next five years.
In terms of forward EV/Sales, HQY is currently trading at 6.79x, 805.3% higher than HUM’s 0.75x. In terms of non-GAAP forward PEG, HUM’s 1.16x compares with HQY’s 2.18x.
HUM’s trailing-12-month revenue is 112.5 times that of HQY’s. Also, HUM is more profitable, with a 3.5% net income margin versus HQY’s negative value.
Furthermore, HUM’s levered free cash flow margin and ROE of 4.1% and 20.6% compare with HQY’s negative values.
While HUM has an overall A grade, which translates to Strong Buy in our proprietary POWR Ratings system, HQY has an overall D grade, equating to Sell. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
HUM has been graded a B for Value, in sync with its lower-than-industry valuation ratios. HUM’s 0.75x forward EV/Sales is 80.6% lower than the industry average. HQY’s D grade for Values reflects its overvaluation. HQY’s 6.79x forward EV/Sales is 74.5% lower than the industry average.
HUM has a B grade for Sentiment, reflecting its higher earnings growth expectation than its industry peers. HUM’s EPS is expected to grow 19.3% year-over-year to $24.63 for fiscal 2022 ending December 31, 2022. HQY’s D grade for Sentiment is in sync with its lower earnings estimates. HQY’s EPS is expected to decline 3.8% year-over-year to $1.28 for fiscal 2022 ending January 31, 2023.
Of the 11 stocks in the A-rated Medical – Health Insurance industry, HUM is ranked #5, while HQY is ranked #11.
Beyond what we have stated above, our POWR Ratings system has graded HQY and HUM for Stability, Growth, Momentum, and Quality. Get all HQY ratings here. Also, click here to see the additional POWR Ratings for HUM.
Inelastic demand for healthcare products and services should help HUM and HQY stay afloat amid these uncertain times. However, HUM is a better buy based on favorable analyst sentiment, higher profitability, and lower valuation.
Our research shows that the odds of success increase if one invests in stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Medical – Health Insurance industry.
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HUM shares were trading at $490.86 per share on Tuesday afternoon, down $0.93 (-0.19%). Year-to-date, HUM has gained 6.19%, versus a -17.13% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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