Extended CMS And VA Contracts And Tech Modernization Opportunities Will Strengthen Future Prospects

Key Takeaways

• Continued operation of the CMS Contact Center and VA contracts ensures consistent revenue and growth potential in service areas.
  
• Divestitures and share repurchase programs are expected to enhance profitability and improve earnings per share.
  
• Dependency on government contracts and policy uncertainty could impact revenue, with foreign exchange losses and competitive pressures affecting financial performance and margins.

Catalysts

Operates as a provider of government services worldwide.

• The government withdrew the early recompete of the CMS Contact Center Operations contract, allowing Maximus to continue operating it through 2031, which ensures long-term revenue stability.
  
• Successful re-award of the VA Medical Disability Examination contracts will maintain and potentially grow revenue streams from this key service area.
  
• The divestiture of employment services businesses in Australia and South Korea is expected to improve profitability in the Outside the U.S. segment by reducing volatility, boosting net margins.
  
• The $200 million increase in the share repurchase program suggests that Maximus is using its capital to reduce share count, which could significantly enhance the company's EPS.
  
• New business opportunities in federal technology modernization align well with Maximus’s capabilities, potentially increasing revenue via contracts that improve government efficiency.

Maximus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Maximus's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 5.7% in 3 years time.
• Analysts expect earnings to reach $308.3 million (and earnings per share of $5.3) by about March 2028, up from $284.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.4x on those 2028 earnings, up from 13.7x today. This future PE is lower than the current PE for the US Professional Services industry at 21.7x.
• Analysts expect the number of shares outstanding to decline by 6.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.29%, as per the Simply Wall St company report.

Maximus Future Earnings Per Share Growth

Risks

• The company's dependence on government contracts means that procurement delays or changes in policy could significantly impact revenue generation and growth prospects.
  
• Economic or political changes that lead to reduced or reallocated government spending could adversely affect revenue streams linked to entitlement program contracts.
  
• Uncertainty in the policy environment, especially with looming federal budget appropriations and potential new spending restrictions, could impact future revenues and earnings.
  
• Competitive pressures and reliance on maintaining or winning recompete contracts may affect net margins if contract terms become less favorable.
  
• Foreign exchange losses from divestitures indicate potential volatility in earnings, which could impact net margins and overall financial performance.

Valuation

• The analysts have a consensus price target of $102.0 for Maximus based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $114.0, and the most bearish reporting a price target of just $90.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.4 billion, earnings will come to $308.3 million, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 7.3%.
• Given the current share price of $68.55, the analyst price target of $102.0 is 32.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.