This business process management company beat analysts’ estimates by $0.04 last quarter. Wall Street is forecasting that the company will grow 45% this quarter and 21% in 2017.
MAXIMUS (MMS)
From Hendershot Investments
MAXIMUS (MMS) delivers innovative business process management and technology solutions that contribute to improved outcomes for citizens and higher levels of productivity, accuracy, accountability and efficiency of government-sponsored programs. With more than 16,000 employees worldwide, MAXIMUS is a partner to government agencies in the United States, Australia, Canada, New Zealand, Saudi Arabia and the United Kingdom.
For more than 40 years, MAXIMUS has used its experience, business process management expertise and advanced technological solutions to help government agencies run efficient, cost-effective programs, improve accountability and outcomes and enhance the quality of services provided to program beneficiaries.
MAXIMUS is a leading operator of health insurance exchange customer contact centers and a provider of state Medicaid and Children’s Health Insurance Program services. MAXIMUS is also the largest U.S. and U.K. provider of government-sponsored health benefit appeals and assessments. The company is one of the largest providers of occupational health services in the U.K. MAXIMUS is also an established provider of welfare-to-work services throughout the geographies the firm serves.
Most of the company’s revenue is derived from long-term contractual arrangements with governments, which provides management with good visibility in terms of predicting revenues. The average contract life is five years, including options, with contract margins in the 10%-15% range on a typical basis. Client relationships frequently last for decades.
About 53% of the company’s $2.1 billion revenues in fiscal 2015 were generated by the Health services business segment, 24% by the U.S. Federal Services segment and 23% by the Human Services segment.
Over the past five years, the company has generated strong double-digit growth. Revenues have compounded at a 23% annual rate with EPS growing at a 20% annual rate thanks to demographic, economic and legislative trends. Aging populations have placed a greater strain on health care and welfare systems. Governments need to manage budgets in the face of increasing demands for social services. Legislative initiatives such as the Affordable Care Act and welfare reform efforts in the U.K. require the implementation of new services and programs. With a proven track record and expertise, MAXIMUS is in a strong position to provide those services and deliver valuable solutions to governments.
In addition to solid organic growth, MAXIMUS has pursued selective acquisitions to spur future growth by expanding their offerings and geographic presence. During the fiscal second quarter of 2016, double-digit growth continued as both revenues and earnings grew 26%. The increase in revenue was attributable to acquisitions which accounted for 15% of growth and organic growth of 13%, principally from the Health Services segment, partially offset by a 2% foreign currency headwind.
MAXIMUS generates profitable growth with return on shareholders’ equity averaging 22.5% over the last five years. The company deploys capital in a prudent manner, paying a modest dividend while making opportunistic share repurchases, which have totaled nearly $300 million over the past five years. As of 3/31/16, the company had $139.4 million remaining authorized for future share repurchases.
Year-to-date signed contract awards at 3/31/16 totaled $1.1 billion. The sales pipeline at 3/31/16 increased 23% to $3.2 billion with more than half of the pipeline associated with new work across all business segments and geographies.
Management expects revenues in fiscal 2016 to range between $2.4-$2.5 billion which should generate EPS in the range of $2.50-$2.70. The company expects strong cash flow generation in fiscal 2016 with cash flow from operations in the range of $200-$230 million and free cash flow in the range of $130-$160 million.
Long-term investors may want to contract with MAXIMUS, a HI -quality company with predictable revenues, double-digit growth and strong cash flows. Buy.
Ingrid R. Hendershot, Hendershot Investments, www.hendershotinvestments.com, 703-361-6130, June 2016