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Robert Abbott
Robert Abbott
Articles (318)  | Author's Website |

Maximus: Waiting for a Further Dip

An excellent mid-cap with a strong history and good growth prospects

April 13, 2018 | About:

A new chief executive took over the corner office at Maximus Inc. (NYSE:MMS) on April 1. Bruce Caswell, who’s been with the company since 2004, takes over an operationally and financially robust enterprise.

When governmental health and human services departments want to outsource the business management of their operations, one of the companies they turn to is Maximus. In its most recent 10-K (for the year ending Sept. 30, 2017), the company says, "We use our experience, business process management expertise, innovation and technology solutions to help government agencies run effective, efficient and accountable programs.

It operates in three segments: Health Services (56% of revenue), U.S. Federal Services (22% of revenue) and Human Services (22% of revenue). Its growth drivers are:

  • Demographic trends.
  • Long-term contracts with governments.
  • Deep client relationships, including IT embedding.
  • Financial flexibility.
  • Active pursuit of strategic acquisitions.

Maximus also has a three-pronged, long-term growth strategy: Grow in existing markets, move into adjacent markets and incorporate new growth platforms.

The share price has enjoyed an almost 90% increase in the past decade. From a low of $7.69 in November 2008, it climbed above $71 before slipping back to $67 (close of trading April 12). As a result of a pullback that began in December, the stock is currently down 6.6%.

Maximus Inc price chart

Does that decade-long ascent and the current pullback make this a good stock and a good time to buy? To assess it, we turn to the Macpherson model, which in turn allows us to quantify what Warren Buffett (Trades, Portfolio) calls “a great company at a great price.”

The Macpherson model uses specific criteria for judging the “greatness” of a company, starting with a set that assesses financial strength, profitability and growth (all data from GuruFocus):

Maximus Inc financial strength, profitability, growth

Maximus cut its long-term debt from $211 million in fiscal 2015 to $12 million in fiscal 2017. That gives it a 16.34 cash-to-debt ratio (free cash flow of $313 million), and thus a “Pass” rating despite the existence of debt.

The second set assesses the strength of a company’s moat, or its competitive advantage (does it have pricing power?):

Maximus Inc moat

The third set uses discounted cash flow analysis to assess its intrinsic value (or margin of safety):

Maximus Inc intrinsic value

The GuruFocus system says, “Maximus Inc. is more suitable for Earnings Power Based valuation methods.” That makes it an overvalued stock, despite the current dip.

Since free cash flow-based DCF can be given less influence, it can be argued that Maximus is a great company at a not-so-great price (with company greatness subject to further fundamental research).

Other data:

  • Revenue: Maximus has steadily grown its revenue over the past 10 years. Over the three most recent years, it grew revenue by an average of 14.6% per year.
  • Operating margin: relatively flat since 2010, and currently 12.93%.
  • EBITDA: steady growth over the past decade, an average of 13.3% over the past three years.
  • Dividends: the dividend yield for the past fiscal year was 0.26% (18 cents) and the yield has fallen steadily over the past 10 years. Payout ratio is 0.05%.
  • Buybacks: the company has not bought back shares, nor has it issued new shares.
  • Beta: 1.16, which means it tracks the S&P 500 quite closely.

Among the GuruFocus gurus, six own shares in Maximus: Ron Baron (Trades, Portfolio), Columbia Wanger (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio). Baron owned more than 3 million shares at the end of 2017, while Pioneer owned just 2,271.

Of the six Maximus transactions among the gurus, three were reductions and three were either add or buy.

Institutional investors own 97.45% of the company's shares, while insiders own just over 5% (presumably some of the institutional shares are short). Looking ahead, in announcing its fiscal first-quarter 2018 results, Maximus upped its guidance on earnings because of changes in tax rules. It expects to pick up another 35 cents per share, resulting in a range between $3.30 to $3.50 for fiscal 2018.

The company expressed optimism about longer-term growth and profitability in its 10-K for 2017, issued late last year. That perspective is outlined in the three-pronged, long-term growth strategy:

  • As well as having incumbency on its side, its contracts are three to five years, with additional option years. As a result, it has long-term relationships with many clients.
  • Moving into adjacent markets means leveraging existing capabilities into similar areas. It gives the example of a pilot welfare-to-work program in Singapore, based on work done elsewhere.
  • New growth platforms are developed organically and through acquisitions. For example, the acquisition of Health Management brought in “significant” occupational health capability.

Conclusion

New CEO Caswell takes over Maximus at an opportune time. The company has not only built a solid business around its three government-assisting segments, but it has also defined a strategic and practical plan for future growth.

He also inherits some excellent financial measures, good enough to gain a tentative “great company” designation. Maximus has strong returns on assets, returns on equity and returns on tangible equity, which means good financial strength, profitability and growth prospects. Its moat is also strong, which will allow it to maintain its pricing in at least the medium term.

For value investors, price will be the sticking point. A great company with a rich valuation is not going to get much attention from them, although growth investors may be tempted.

Watch and wait is the best advice for this stock.

Disclosure: I do not own shares in any of the companies listed, and do not expect to buy any in the next 72 hours.

About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995, and in 2010 added options, mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the Unseen Revolution. In Big Macs & Our Pensions: Who Gets McDonald's Profits?, he looks at the ownership of McDonald’s and what that means for middle class retirement income.

In an eclectic career, Robert Abbott was a radio news writer and announcer, a newsletter writer and publisher, a farmer, a telephone operator, and a construction worker. When not working, he has been a busy volunteer, which includes more than a decade of leadership roles at the Airdrie Festival of Lights, one of North America’s leading holiday light displays. He lives in Airdrie, Alberta, Canada.

Visit Robert Abbott's Website


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