KeyBanc Likes HMS, But Is Awaiting A Better Entry Point

HMS Holdings Corp’s HMSY stock provides a way for investors to gain exposure to the growing use of artificial intelligence and robotic process automation for improving health management and reducing payment errors and fraud in the U.S. healthcare industry, according to KeyBanc Capital Markets.

The Analyst

KeyBanc’s Donald Hooker initiated coverage of HMS Holdings with a Sector Weight rating.

The Thesis

HMS Holdings has a strong presence in the Medicaid space, given that it's the incumbent provider of third-party liability services for more than 40 state Medicaid programs and over 325 associated Managed Medicaid plans. This gives the company a “somewhat recession resistant profile,” Hooker said in a note.

The company generates around 80% of its revenues from Medicaid programs. Over the past 20 years, state government spending on Medicaid entitlement programs has grown at an annual rate of more than 6%, and KeyBanc’s projections for HMS Holdings are based on this trend.

Hooker said multiple states are likely to add benefits and expand the eligibility criteria in their Medicaid programs. Moreover, the Bipartisan Budget Act of 2018 has provided a small boost to HMS Holdings in states where Children's Health Insurance Program (CHIP) benefits are administered separately from Medicaid.

While HMS Holdings is likely to generate high-single-digit organic revenue growth and expand its operating margins going ahead, Hooker said its stock appears fairly valued at the current levels.

Price Action

Shares of HMS Holdings fell 3.3% Monday to close at $30.81.