Tactical Investments And Government Contracts Propel Future Growth And Stability

Key Takeaways

• Investing in technology and new contracts like the IRS and TSA indicates a focus on operational efficiency and a robust growth pipeline.
  
• A disciplined approach to capital allocation and financial flexibility points towards positive future earnings growth and shareholder return.
  
• Maximus faces revenue stability challenges from reliance on government contracts, rebid uncertainties, revenue reductions in U.S. Services, growth execution risks, and slower projected growth impacting margins.

Catalysts

Operates as a provider of government services in the United States and internationally.

• The company expects organic growth to replace revenue falling off, suggesting future stability in revenue streams, despite acknowledging that some of the presently high volumes in the U.S. Services segment related to Medicaid redetermination are likely to moderate. This could mean a more predictable and possibly growing baseline for revenue.
  
• Maximus is investing in technology such as automation and digital solutions (e.g., CCaaS capability through TXM and MES solutions for Medicaid programs), indicating an improvement in operational efficiencies which could lead to better margins and an enhanced competitive edge impacting net margins and earnings.
  
• The focus on new contract wins, such as the IRS and TSA contracts, and successfully rebidding of existing ones like the Independent Enrollment Broker contract in Pennsylvania, show a robust pipeline for future growth, potentially impacting both revenue and net margins.
  
• The management's disciplined approach to capital allocation, including opportunistic share repurchases and dividends that increase with earnings, suggests a positive outlook on future earnings growth and shareholder return.
  
• The reduction of the net debt-to-EBITDA ratio to 1.5x and the amendment of the credit agreement to extend maturity dates provide the company with financial flexibility for future growth initiatives or acquisitions, which could further enhance revenue and earnings.

Assumptions

• Analysts are assuming Maximus's revenue will grow by 1.5% annually over the next 3 years.
• Analysts are assuming Maximus's profit margins will remain the same at 5.6% over the next 3 years.
• Analysts expect earnings to reach $308.9 million (and earnings per share of $4.93) by about November 2027, up from $293.6 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 27.8x on those 2027 earnings, up from 16.4x today. This future PE is greater than the current PE for the US Professional Services industry at 23.7x.
• Analysts expect the number of shares outstanding to grow by 1.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.73%, as per the Simply Wall St company report.

Risks

• The reliance on government contracts and policies can impact revenue stability, especially with changes in political landscapes affecting the scope and funding of public programs, potentially impacting revenues.
  
• The rebid process for key contracts, like the IRS and TSA mentioned, introduces uncertainty and volatility into future earnings projections, as failure to secure these rebids can directly affect revenue streams.
  
• The transition of Medicaid redetermination work back to pre-pandemic levels could lead to a reduction in revenues in the U.S. Services segment, as mentioned with the anticipated moderation of non-recurring revenue streams.
  
• The company's ambition to grow through acquisitions, as part of its capital allocation strategy, carries execution risk, including integration challenges and potential dilution of earnings if not executed efficiently.
  
• The guidance for fiscal 2025 projecting a revenue plateau, potentially similar to fiscal 2024 levels, suggests an expectation of slower growth which could impact net margins and earnings growth, especially if investment in technology and acquisitions does not yield the anticipated returns or operational efficiencies.
  

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 $308.9 million, and it would be trading on a PE ratio of 27.8x, assuming you use a discount rate of 6.7%.
• Given the current share price of $79.81, the analyst's price target of $114.0 is 30.0% 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.