2023-03-27 18:50:31 ET
Summary
- Maximus reported its FQ1 2023 financial results on February 9, 2023.
- The firm provides a range of outsourcing services to U.S. federal and state government agencies.
- Management expects Medicaid redeterminations to resume but it will depend on varying states' readiness to do so.
- Given the recent rise of the stock and the uncertainty around its future growth prospects due to forces beyond its control, I'm on Hold for MMS in the near term.
A Quick Take On Maximus
Maximus ( MMS ) reported its FQ1 2023’s financial results on February 8, 2023, beating revenue and EPS consensus estimates.
The company provides business process outsourcing services to U.S. and state government health and human services administrations.
Given the stock’s rise in price since my last Buy outlook and the uncertainty at the speed of redetermination processes by various states, I believe it could be fully valued at its current price of around $78, so I’m on Hold for MMS in the near term.
Maximus Overview & Market
Tysons, Virginia-based Maximus was founded in 1975 to provide business process outsourcing services via three segments:
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U.S. Services
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U.S. Federal Services
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Outside the U.S.
The firm is headed by Chief Executive Officer Bruce Caswell, who was previously Vice President Public Sector at IBM and Manager, Office of Government Services at Price Waterhouse.
The company acquires customers through federal and other contract bidding processes.
According to a 2022 market r esearch report by Grand View Research, the global market for all types of business process outsourcing was an estimated $246 billion in 2021 and is forecast to reach $530 billion by 2030.
This represents a forecast CAGR of 9.1% from 2022 to 2030.
The main drivers for this expected growth are a growing focus on organizations and agencies in obtaining greater business efficiencies and an increase in the use of technology to drive such efficiencies.
Also, the chart below shows the historical and projected future trajectory of the North American business process outsourcing market:
N. America Business Process Outsourcing Market (Grand View Research)
Management views its total addressable market size at $150 billion.
Maximus’ Recent Financial Results
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Total revenue by quarter has risen per the following chart:
Total Revenue History (Seeking Alpha)
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Gross profit margin by quarter has fluctuated within a narrow range:
Gross Profit Margin History (Seeking Alpha)
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Selling, G&A expenses as a percentage of total revenue by quarter have varied little from quarter to quarter:
Selling, G&A % Of Revenue History (Seeking Alpha)
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Operating income by quarter has fluctuated appreciably over the past nine quarters:
Operating Income History (Seeking Alpha)
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Earnings per share (Diluted) have also varied materially:
Earnings Per Share History (Seeking Alpha)
(All data in the above charts is GAAP)
In the past 12 months, MMS’ stock price has risen 0.64%, as the chart indicates below:
As to its FQ1 2023 financial results, total revenue rose 8.5% year-over-year and gross profit margin was flat.
SG&A expenses as a percentage of total revenue have been rising in recent quarters and operating income has been trending lower in recent quarters.
Earnings per share dropped markedly year-over-year, from $0.85 to $0.65 in the most recent quarter.
For the balance sheet, the company ended the quarter with $63.1 million in cash and equivalents and $1.56 billion in total debt.
Over the trailing twelve months, free cash flow was $92.6 million, of which capital expenditures accounted for $65.5 million. The company paid $26.6 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For Maximus
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 1.3 |
Enterprise Value / EBITDA | 14.6 |
Price / Sales | 1.0 |
Revenue Growth Rate | 6.0% |
Net Income Margin | 4.0% |
GAAP EBITDA % | 9.1% |
Market Capitalization | $4,560,000,000 |
Enterprise Value | $6,240,000,000 |
Operating Cash Flow | $158,100,000 |
Earnings Per Share (Fully Diluted) | $3.08 |
(Source - Seeking Alpha)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:
Assuming generous DCF parameters, the firm’s shares would be valued at approximately $64.29 versus the current price of $75.71, indicating they are potentially currently overvalued, with the given earnings, growth, and discount rate assumptions of the DCF.
Future Prospects For Maximus
In its last earnings call (Source - Seeking Alpha), covering FQ1 2023’s results, management highlighted its increased revenue and earnings guidance for fiscal 2023.
Management expects its debt ratio ‘to improve over the remainder of fiscal year 2023.’ It increased its adjusted EPS guidance by $0.30 per share to $4.30. Adjusted EPS excludes intangibles amortization and stock-based compensation.
Revenue is expected to grow by 6.5% at the midpoint of the range, ‘substantially all organic and overcomes the $300 million reduction in short-term COVID response work.’ This is an increase of $100 million in revenue from its previous forward guidance.
Management expects free cash flow of $250 million for the year, at the midpoint of the range.
While the Consolidated Appropriations Act recently passed includes directions to states regarding restarting Medicaid redeterminations, such work will be uneven on a state-by-state basis.
Given the stock’s rise in price since my last Buy outlook and the uncertainty at the speed of redetermination processes by various states, I believe it could be fully valued at its current price of around $78, so I’m on Hold for MMS in the near term.
For further details see:
Maximus Is Upbeat On Guidance But Growth May Be Uneven