In his State of the Union address Tuesday night, President Bush is widely expected to discuss health savings accounts (HSAs). Bush has been a vocal supporter of HSAs and creating a consumer driven marketplace for healthcare.
Big names in financial services such as
Bank of America
( MEL) and
have already begun to open HSA accounts, while
have plans to offer them in the future.
But "health savings accounts will make up only a small fraction of earnings at a financial giant like Citigroup," as
The New York Times
duly noted Friday in a classic "to be sure" sentence.
On the other hand, HSAs have the potential to dramatically move the needle for smaller financial institutions such as
, the largest custodian of HSAs in the country.
The holding company for Webster Bank, which operates 157 branches in New England, Webster Financial is a perfect candidate for The Real Story's contrarian bent. The stock is not well liked on Wall Street, providing an opportunity for investors willing to do a little independent analysis.
The Consensus Story
: Wall Street views Webster as an average bank with mediocre margins and flat earnings growth. Due to the lack of growth, most analysts view the stock as fully or even overvalued. Only two analysts rate Webster a buy, while five have it a hold and three recommend selling the shares. That includes two downgrades Friday after the company reported fourth-quarter results and warned that earnings would not grow in 2006.
Like many financial institutions, Webster's margins have suffered due to the flattening yield curve. Management expects more of the same in the first half of the year, with margins stabilizing in the second half. Recently, analysts slashed their estimates for 2006: Merrill Lynch, which rates the stock a buy, cut its EPS forecast to $3.45 from $3.90. Ryan Beck & Co. downgraded the stock to underperform last week and also sliced its earnings estimate to $3.45 from $3.69. Merrill and Ryan have both performed investment banking services for Webster in the past 12 months.
Other negatives include high fourth-quarter expenses due to expansion. Non-performing assets rose as well.
The Real Story
: Webster is turning around its operations, albeit slowly. The company operates in demographically desirable areas. Most of the bank's branches are in affluent Connecticut. It recently expanded into Westchester County, N.Y. -- another area known for attractive demographics. Although nonperforming assets spiked in the fourth quarter, they still are within acceptable boundaries. The bank saw deposit fees increase 11% over a year ago. And the company has been actively deleveraging its balance sheet.
The hidden jewel, however, is newly acquired HSA Bank, which may attract a stampede of interest from customers and investors as health savings accounts become more popular and receive media attention.
Health savings accounts are like an IRA for your health care costs. The money that is contributed to the account is pretax and can be withdrawn to pay medical costs that are not covered by insurance. To qualify, you must be enrolled in a High Deductible Health Plan (HDHP). For 2006, the required deductible is at least $1,050 for an individual or $2,100 for a family.
The funds in an HSA can be invested. For those who are lucky enough to enjoy good health, the money can grow and be used at a later date, perhaps offsetting some major costs down the line. Others can use their contributions to pay for common expenses such as routine doctor visits, dental treatment or over-the-counter drugs.
The skyrocketing costs of health care premiums are making HDHPs more attractive to employers. The increase in HDHPs, not surprisingly, is sparking interest in health savings accounts. Currently, there are about 3 million people enrolled in HSAs -- triple the number since March 2005. That figure is likely to grow substantially.
Mohit Ghose, vice president of public affairs with industry trade group America's Health Insurance Plans (AHIP), said that 2006 will see the first wave of large employers offering HSAs.
But it's not just large companies trying to slash their health care costs that are offering the programs. AHIP found that 27% of the policies sold to small employers were to companies that did not previously offer health care coverage to their workers.
Friends in High Places
The HSA movement could accelerate following an endorsement by the president, which is akin to an author receiving approval from Oprah (dented reputations aside for both bigwigs). Whether the president has the political capital to influence a drastic change in health care remains to be seen, but at the very least it should draw attention to the fledgling industry.
This is where Webster comes in. On Webster's earnings call on Jan. 26, Nathaniel Brinn, CEO of HSA Bank, said his organization currently has 144,000 accounts and $237 million in deposits. That's an increase of 4% and 13%, respectively, since year-end.
Brinn was careful not to set expectations too high. He mentioned that while smaller employers are embracing the programs, larger employers are moving more slowly and not forcing employees into HDHPs this year. However, Brinn pointed out that two
500 companies became clients in 2005 (he didn't specify). The CEO said he expects single-digit penetration into existing large-employer clients in 2006. He hopes to not only have more large clients on board in 2007, but penetration upwards of 10% into those companies.
Webster currently trades at a forward price-to-earnings ratio of 12.5, a 15% discount to its peers. I would argue that the opportunity at HSA Bank makes up for the weakness in other areas and that the stock should trade at least in line with its peers.
Moreover, I believe Webster gets bought by a financial institution, looking to pick up not only the HSA business, but a bank that serves many well-heeled communities.
Friedman Billings Ramsey analyst Laurie Hunsicker believes that Webster could be worth as much as $60-$65 per share in an acquisition. FBR provides non-investment banking, securities-related services to Webster. I believe that the low end of Hunsicker's range sounds reasonable, and $60 is 29% above Monday's closing price.
Investors shouldn't buy a stock simply on the hopes the company gets acquired. Luckily, there are other reasons to own Webster. As I mentioned earlier, the company is in the midst of a turnaround. Investors should think about getting in before the ship is completely righted and all of the analysts get back on board. You get a secure 2.2% dividend while waiting and the HSA business is sure to attract a lot of attention as it becomes a hot-button issue in 2006, maybe even starting tonight.
In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.
Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;
to send him an email.