Maximus (NYSE:MMS) has demonstrated a slight pullback following weaker-than-expected earnings due to macro headwinds. I believe that Maximus is currently a hold because even though the firm pays a fair dividend, is adequately leveraged, and is diversifying its revenues, it is currently overvalued assuming my DCF figures.
The business process services that Maximus, Inc. offers are specifically designed for use with government health and human services initiatives. U.S. Federal Services, Outside the U.S., and U.S. Services make up the company’s three primary operating segments. Maximus offers crucial services such as program eligibility help, centralized client contact centers, digital self-service alternatives, and application support in the U.S. Services division. By providing independent health assessments and employment services like case management and job readiness training, they place a strong emphasis on person-centered treatment.
The U.S. Federal Services business offers clinical services, cutting-edge technological solutions, and similar services to federal health and human services programs. Application development, cybersecurity services, and analytics are some of these options. The Outside the U.S. division offers a variety of business process solutions, such as health and disability assessments and employment services administration, to foreign governments and commercial clients. Maximus plays a critical role in improving service delivery and efficiency within government health and human services programs on a national and international level by providing comprehensive services through these divisions.
Maximus is currently valued at around $4.74 billion in the market, with a fair Return on Invested Capital of 6%. The stock is presently priced at $78.34 per share, slightly below its 200-day moving average of $79.56. It’s noteworthy that the company’s EV/EBITDA ratio stands at 14.35. While this figure is lower than that of some peers, it indicates a potential premium in the stock’s valuation, implying a state of overvaluation.
The firm also pays a dividend of 1.44% demonstrating a payout ratio of 40%. This allows Maximus to provide shareholder value through consistent income while also maintaining adequate FCF in order to keep the dividend safe and expand upon its core business model. The firm has also recently accelerated its share buyback program in order to provide greater EPS to shareholders. Although I believe that this will improve share value, I am against firms repurchasing shares at expensive valuations which is why I am content they are not spending excessive FCF on this initiative.
Maximus released Q3 2023 earnings below expectations, with earnings per share falling short by $0.24 at $0.78, and revenues missing by $10 million at $1.19 billion, representing a 5.3% YoY growth. This reveals the challenges Maximus faces amid macroeconomic headwinds, impacting both profitability and revenue expansion. Given the Federal Reserve’s indication of prolonged stable interest rates and persistent inflation, Maximus might experience a period of difficulty in the near term before a potential recovery. But, on a positive note, analysts are currently projecting a strong recovery from the firm in regards to revenues and EPS as shown below.
Performance Compared to the Broader Market
Over the past 10 years, Maximus has slightly underperformed the broader market when adjusting for dividends. This exemplifies the firm’s ability to produce shareholder value in a multitude of methods such as dividends and core business improvements.
Analysts in the last 3 months currently rate Maximus as a “strong buy” demonstrating the firm’s potential to achieve growth with a price target of $100.67 demonstrating a 29.66% upside.
Maximus’ balance sheet also is relatively sound even though debt has increased in recent years. With an interest coverage of 7.2, Maximus still has ample leverage to hedge against headwinds even in a high-rate environment. The firm also has a Current Ratio of 1.46 and an Altman-Z-Score of 3.28 demonstrating Maximus’ ability to remain solvent in the medium term.
Before finding an accurate fair value for Maximus, I decided it would be prudent to find a solid discount rate by calculating the firms Cost of Equity and WACC. First off, I found the cost of equity to be 9.05% by using a risk free rate of 4.41% based on the 10 year treasury yield. This demonstrates the return investors demand to hold Maximus in the current macro landscape.
Based on the previous calculation and cost of debt, I was able to find the firm’s WACC to be 7.39%.
After calculating the firm’s WACC, I determined that a discount rate of 9% would be appropriate for my DCF analysis. To incorporate potential risks stemming from sustained macroeconomic challenges affecting Maximus’ clientele and the potential elevated debt costs due to increased leveraging, I opted to augment the WACC calculation with a 1.61% risk premium. This adjustment accounts for the impact on cash flow in case of further debt utilization. Employing a 5-year Firm Model DCF using Free Cash Flow to the Firm without CapEx, I established a fair value for Maximus at approximately $59.39, indicating a downside of approximately 24%. My revenue and margin projections aligned with analyst expectations for the foreseeable future.
International Expansion Resulting in Compounding Growth
Maximus, Inc. is intentionally concentrating on extending its reach outside of the US and building a strong global presence. Their plan for international expansion includes locating attractive areas with comparable needs for healthcare and human services. Their successful entry into the Australian market serves as one illustration of their strategy. Maximus adapted its services to fit with the healthcare goals of the Australian government after realizing that the U.S. and Australian healthcare systems faced similar issues. The importance of working closely with regional authorities was underlined in order to comprehend the special dynamics of the Australian healthcare system.
For Australian health organizations, Maximus offers specialized technological solutions and knowledge to improve operational efficiency, handle patient data effectively, and streamline healthcare service delivery. Maximus gained traction and effectively created a reputable presence by tailoring its tried-and-true methodology to the Australian setting and engaging in profitable partnerships, demonstrating the efficacy of its global expansion plan. Maximus’ capacity to adapt and flourish in various healthcare systems while meeting the unique needs of global markets is demonstrated by this strategic strategy.
I think this expansion positions Maximus to tap into previously untouched markets, leading to diversified and increased long-term cash flows. This diversification not only enhances dividend stability but also broadens the company’s customer base. Given Maximus’ substantial size and strong Free Cash Flow, leveraging its core business model to support subsidiary growth is a viable strategy.
Regulatory and Compliance Risks: Compliance with a complex and dynamic regulatory environment is essential given that Maximus offers services to government health and human services programs. Regulation changes or non-compliance might have negative legal and financial effects.
Technological Risks: Maximus runs its business with contemporary technology. Operations could be disrupted and data security compromised by cybersecurity threats, system errors, or technical obsolescence.
To summarize, I believe that Maximus is currently a hold because even though the firm pays a fair dividend, is adequately leveraged, and is diversifying its revenues, it is currently overvalued assuming my DCF figures.