Government Digitization Will Create Future Service Opportunities

Key Takeaways

• Strategic partnerships with government agencies and modernization efforts could drive revenue growth as governments seek improved efficiency and digitalized services.
  
• Stable demand from bipartisan-supported programs, combined with a robust contract pipeline, enhances Maximus' potential for sustained revenue and earnings growth.
  
• Uncertainty in government priorities and workforce impacts contract awards, potentially affecting revenues, earnings, and procurement timing.

Catalysts

Operates as a provider of government services worldwide.

• The company's strategic focus on technology modernization and partnerships with government agencies, like the IRS and Department of Defense, could lead to increased contracts and revenue growth as governments aim to improve efficiency. This is likely to impact revenue positively.
  
• Maximus' role in bi-partisan supported programs, such as veteran benefits and Medicaid management, ensures stable demand and revenue opportunities. These programs could provide consistent revenue streams and aid in maintaining net margins.
  
• The digitization of government services presents a significant opportunity with only 2% of forms currently digitized. As Maximus helps to modernize these processes, they can expect increased demand, potentially boosting revenue and earnings growth.
  
• Strategic investments in business development and innovation, along with optimizing operations, are expected to enhance operational efficiency. This focus on cost reduction and optimization is likely to improve net margins and earnings.
  
• A robust pipeline with $54.3 billion in opportunities, including significant new work, suggests future contract wins will bolster both revenue and earnings. The expected rise in the book-to-bill ratio further supports the potential for revenue growth.

Maximus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Maximus's revenue will grow by 1.4% annually over the next 3 years.
• Analysts are assuming Maximus's profit margins will remain the same at 5.8% over the next 3 years.
• Analysts expect earnings to reach $322.9 million (and earnings per share of $5.23) by about December 2027, up from $306.9 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 26.2x on those 2027 earnings, up from 14.0x today. This future PE is greater than the current PE for the US Professional Services industry at 25.3x.
• Analysts expect the number of shares outstanding to grow by 0.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Maximus Future Earnings Per Share Growth

Risks

• Uncertainty in federal budget priorities and the role of new government entities could impact contract awards and renewals, potentially affecting future revenues and earnings.
  
• Speculation and ambiguity during administration transitions may delay procurement processes, influencing revenue recognition and cash flow timing.
  
• Potential risks associated with changes in key governmental roles and slowdowns in procurement activities could reduce revenue growth from new contracts and extensions.
  
• If reductions in the federal workforce impact procurement functions, it could affect the timing and efficiency of contract execution, impacting revenues and net margins.
  
• Legal challenges around labor agreements and continuity of operations pose a risk to contract renewals, potentially affecting cash flows and earnings.

Valuation

• The analysts have a consensus price target of $114.0 for Maximus based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.5 billion, earnings will come to $322.9 million, and it would be trading on a PE ratio of 26.2x, assuming you use a discount rate of 6.8%.
• Given the current share price of $71.06, the analyst's price target of $114.0 is 37.7% 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.