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- By Robert Abbott
Maximus, Inc (NYSE:MMS) is one of the 56 stocks that currently reside on the Stalwarts list at GuruFocus.
It's a list made up of companies that have a median return on capital of at least 14% over the past 10 years, a predictability rank of at least 2 out of 5 stars, have been profitable in every one of the past 10 years, a revenue growth rate of 8% to 20% per year and an earnings per share (EPS) without non-recurring items (NRI) growth rate of 10% to 20%.
The concept of Stalwart stocks comes from the legendary Peter Lynch, who wrote about them in his book, "One Up on Wall Street."
What is Maximus?
Reston, Virginia-based Maximus offers contract services that help governments serve their citizens. In its 10-K for 2020 (its fiscal year ended on Sept. 30, 2020), it claimed:
"Governments rely on our financial stability and proven expertise in helping people connect and use critical government programs. We use our experience, business process management expertise, innovation and technology solutions to help government agencies run effective, efficient and accountable programs."
Its projects include the Affordable Care Act, Medicaid and Medicare. Recently, it has been working in clinical services, which involves assessments, appeals and independent medical reviews.
The company operates through three segments and multiple subsidiaries. The segments are: U.S. Services, U.S. Federal Services and Outside the United States:
The U.S. Services segment produced 38% of Maximus' revenue in 2020 through a variety of business process services for state and local government programs. Those programs included the ACA, Medicaid, the Children's Health Insurance Program, Temporary Assistance to Needy Families and child support programs.
The U.S. Federal Services segment was responsible for 47% of Maximus' revenue last year. This year, it expects lower revenue because its Census Questionnaire Assistance contract is winding down. However, there are also some positives, including expanded work with the Centers for Disease Control and Prevention's helpline, an outbound customer support center for the Office of the Assistant Secretary for Health and helping the IRS Wage and Investment Division handle general inquiries about the Coronavirus Aid Relief & Economic Security program.
The Outside the United States segment brought in 15% of the company's 2020 revenue. Among the international projects are work with the Health Assessment Advisory Service in the United Kingdom, the "jobactive" and Disability Employment Service in Australia and Health Insurance British Columbia in Canada. It also has operations in Italy, Saudi Arabia, Singapore, South Korea and Sweden.
Its growth is benefiting on the following tailwinds in all its markets and locations:
Demographics: Includes longer life spans that lead to more complex healthcare needs.
Decentralization: The U.S. Federal Government has clarified regulations, allowing states to use contractors for government support services.
Economic environment: Because of Covid-19, levels of unemployment increased around the globe. Maximum is a provider of employment services to governments.
Value for spend: New emphasis on the good use of taxpayer dollars and demands for increased accountability.
The most prominent risks for Maximus involve its relationships with federal, state, local and international governments:
If it fails to meet its contractual obligations, its contracts could be terminated. That could leave some of its costs and liabilities stranded and also hamper its ability to get new contracts.
Since it bids for contracts in competition with other companies, a failure to accurately estimate future costs could hurt it financially.
Two of its government clients, the U.S. Federal Government and New York State, each represent more than 10% of its total revenue.
Maximus lists its competitors by segment:
U.S. Services: In-sourced operations by governments, Conduent (CNDT), Automated Health Systems, Faneuil, KePro, MTX Group and Deloitte
U.S. Federal Services: Serco (SRP), General Dynamics Information Technology, PAE (NASDAQ:PAE), Cognosante, and Conduent. On the technology sector side, they include IBM (NYSE:IBM), Oracle (NYSE:ORCL), Leidos (NYSE:LDOS) and Accenture (NYSE:ACN)
Outside the United States: Atossa Therapeutics Inc (NASDAQ:ATOS), Capita and Interserve (IRV)
The GuruFocus system gives Maximus a respectable score for financial strength, and that's not surprising after looking at some of its metrics.
While the company carries some debt, it is limited as we see in the first four lines of the table. In particular, note the strength of the interest coverage ratio. This company will have no trouble in paying its interest expenses.
In turn, that helps push the Altman Z-Score well into the safe range. While not quite as high, the Piotroski F-Score indicates the company is well-managed..
The return on invested capital (ROIC) at 15.67% is more than double the weighted average cost of capital (WACC) at 5.45%.
On the profitability table, the green bars tell us the operating margin and net margin are better than those of most companies in the Business Services industry, although not as good as they were in Maximus' past.
Looking back 10 years, we see they have been trending downward, with sharp declines in the past couple of years:
The extended declines suggest the company operates in an increasingly competitive environment, putting constraints on its pricing power.
The growth lines at the bottom of the table tell us that while revenue has been growing robustly, not a lot of it is making its way to the bottom line. Here's revenue over the past 10 years:
Ebitda was growing until reverses in 2018 and 2020:
EPS grew quite robustly until 2020:
Summing up the profitability situation, we might say it is mixed news. The margins have slipped, but earnings per share grew at a fast clip until last year.
Since earnings grew steadily until last year, the likely culprit seems to be the Covid-19 pandemic. The company has reported that it experienced both favorable and unfavorable effects from the pandemic:
"While some of the programs we support have experienced reduced volumes due to the pandemic, we have also been successful in winning new contracts tied to public health initiatives such as contact tracing and unemployment insurance programs to help governments respond to the COVID-19 crisis. The individuals and families served under these programs are those considered some of the most vulnerable to COVID-19."
Dividend and share buybacks
After years of holding the dividend at $0.18, Maximus pumped it up in fiscal 2019 to $1.00 per share and then followed up with another $0.12 raise in 2020:
Those two bumps explain the high three-year dividend growth rate shown on the table. And despite the recent runup in the share price, the dividend yield has been relatively constant:
The share count has been coming down over the past 10 years, slowly but steadily:
This chart shows the growing share price while the trendline indicates the increase has averaged 13.66% per year:
These are the annualized returns:
Year to date: 23.45%
One year: 32.70%
Three years: 14.14%
Five years: 11.41%
10 years: 16.05%
There is a discrepancy between the trendline and the annualized return for 10 years because the trendline includes the last three months of 2020 and 2021 to date. It appears the closing date for the annualized return for the past 10 years was Sept. 28, 2020, the end of the fiscal year.
The GuruFocus Value Line indicates that Maximus is modestly undervalued:
The price-earnings ratio suggests slight overvaluation at 25.33, which is higher than the industry median of 22.82 and above its own 10-year median of 20.74.
The PEG ratio, which is the price-earnings ratio divided by the five-year Ebitda growth rate, is high at 5.17 (the fair value mark is 1.00). The industry median is 2.28 and the company's own 10-year median is 1.25.
The earnings-based discounted cash flow (DCF) calculator also shows the stock as being undervalued. Based on a 3 out of 5 star predictability rating rating, the DCF can be considered decently reliable and indicates there is a solid margin of safety given the below assumptions:
The gurus were big buyers of Maximus in the fourth quarter of last year, but have since pulled back:
At the end of the first quarter of 2021, five of the gurus had common stock holdings in the company, including:
Jim Simons (Trades, Portfolio) of Renaissance Technologies, who added 63.07% in the fourth quarter, boosting his firm's holding to 363,800 shares, representing 0.59% of the company's outstanding shares and 0.03% of the Renaissance portfolio.
Chuck Royce (Trades, Portfolio) of Royce Investment Partners cut his holding by 8.39% in the first quarter and finished with 89,550 shares.
Maximus clearly has earned its place on the Stalwarts list. That characterization seems an apt description, as Maximus is financially solid, profitable and still growing its top and bottom lines. The only long-term concern are the shrinking margins. Valuation also seems to be a positive if you judge from the GuruFocus Value Line and the discounted cash flow calculator.
Value investors will find this name worthy of further investigation, as will growth investors looking for steady share price increases over the next five to ten years. For income investors, it may be worth consideration, but there are better opportunities.
Disclaimer: I do not own shares in any of the companies named in this article and do not expect to buy any in the next 72 hours.
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This article first appeared on GuruFocus.