Maximus: An Undervalued Gem That Can Provide Double-Digit Returns

Core Viewpoint - Maximus, Inc. is identified as a potentially undervalued investment opportunity, with a strong business model and growth prospects despite being lesser-known in the market [1][2]. Company Background - Maximus is a provider of government health and human services programs, primarily operating in the U.S. with three reportable segments: U.S. Federal Services, U.S. Services, and Outside the U.S. [4] - The company generates nearly $5 billion in annual revenue and has a market capitalization of $5.3 billion [4]. Recent Earnings Results - Maximus reported third-quarter earnings with revenue growth of 10.1% to $1.31 billion, exceeding estimates by $20 million [6]. - Adjusted earnings-per-share were $1.74, significantly higher than the previous year's $1.04 and beating expectations by $0.22 [6]. - The U.S. Federal Services segment saw a revenue increase of 17% to $683.3 million, representing 52% of total sales [6]. - The company raised its full fiscal year guidance for adjusted earnings-per-share to a range of $6.00 to $6.20, indicating a 59% increase from FY 2023 [7]. Growth and Margin Analysis - Maximus has achieved consistent revenue growth, with a compound annual growth rate (CAGR) of nearly 12% over the past decade, except for 2018 [8]. - The operating margin improved to 10.8%, up from 4.9% in Q3 2023, with U.S. Federal Services expanding its margin to 15.5% [8]. - The company signed contracts worth $1.25 billion year-to-date, with a book-to-bill ratio of 0.6, down from 1.1 in the previous quarter [8]. Future Growth Potential - Maximus estimates a total addressable market of approximately $34 billion, with pending proposals of $2.9 billion and $7.3 billion in preparation [9]. - The company anticipates operating margins of 12.5% and 13% for its U.S. Federal Services and U.S. Services segments, respectively, for FY 2024 [9]. Dividend Analysis - Maximus has distributed dividends for 18 consecutive years, with a CAGR of nearly 23% over the last decade, although recent growth has been lower at less than 4% per year [10]. - The expected earnings payout ratio for FY 2024 is 20%, indicating a well-covered dividend [10]. Valuation and Return Potential - Shares of Maximus are trading at 14.3 times expected adjusted earnings-per-share, below the sector median of 18.8 [11]. - The company is projected to achieve total returns exceeding 10% per year, combining earnings growth, dividend yield, and potential multiple expansion [12]. Final Thoughts - Maximus is experiencing growth in key business areas, with a high renewal rate for contracts, which positions the company for margin improvements [14]. - The current market valuation does not reflect the improving business model, presenting a potential investment opportunity [14][15].