Hey, ever heard of ObamaCare?
Of course, I'm talking about the 2010 Affordable Care Act, or ACA.
Some of the key parts of the ACA include mandated health insurance marketplaces, better consumer assistance and protections, and improved matching funds for state-based Medicaid.
The ACA has been debated ad nauseam by Congress and pushed back on by many large businesses.
But I'm more interested in the companies that can benefit from it. Particularly ones we can invest in. Particularly cheap, Magic Formula® stocks we can invest in.
And there could be one such company currently in the MF screens: Maximus (MMS, Financial). Are you not intrigued? Let's take a look.
Maximus: Implementing ObamaCare
Maximus provides business process services for government programs. It has two segments: Health Services and Human Services.
Health Services contributes about 65% of revenue and is by far the faster growing of the two units. This unit provides services such as health insurance exchange management, consumer education, health appeals management, application and enrollment assistance, and so forth. Maximus operates not only under the ACA, but also Medicaid, the Children's Health Insurance Program (CHIP), Medicare, and Canada's Health Insurance British Columbia Program.
Human Services focuses mainly on the administration of welfare-to-work programs in the U.S., U.K. (theWork Programme), and Australia (which contributes about 1/3rd of this segment's revenue). Other, smaller services include child support case management, consulting for K-12 and higher education institutions, and tax consulting services.
Maximus earns the majority of its revenues from state governments (56%), with foreign federal programs contributing 24%, the U.S. federal government 12%, and municipalities and commercial clients 8%. Almost 80% of the company's contract are performance-based or fixed cost, putting the pressure on the company to execute and bid efficiently, but also providing more upside for profitability and a better chance of winning business.
Growth is Good
Maximus has benefitted greatly from the demand for health administrative services stemming from the implementation of ACA. The company's 5-year compound annual growth rate (CAGR) in revenue is over 18%, and margins have steadily increased, driving a 22.4% CAGR in operating earnings. The momentum continues today. In the most recent quarter, Maximus reported a 26% rise in revenue and 22% in profits.
Going forward, there are plenty of catalysts for Maximus to continue to growing at low-to-mid teens growth rate percentages. The increased number of enrollees under ACA, as well as an aging U.S. populace, will increase case load and demand for exchange services, a boon to Maximus. Welfare reform abroad continues to trend to a U.S.-style solution. Maximus is well-positioned to capitalize on this, given its experience in Australia and the UK, and recently began work on a similar contract in Saudi Arabia.
Growth potential is acceptable. Agree?
Financial Strength (and Honor)
Maximus is a robust company financially. The firm carries a minuscule amount of debt ($1.3 million), offset by $183 million in cash in the bank. Free cash flows are strong and stable, averaging about 63% of operating income (the firm has a rather high 38% tax rate). Maximus pays a miserly dividend (0.4% yield), but at just 8% of free cash flow, it has plenty of room to rise going forward. Historically, the company has bought back just enough shares to offset stock compensation dilution, but a recent $150 million expansion of the program should begin driving share count down.
Maximus has been a solid operator. Operating margins have risen from 11.7% in 2009 to over 14% today. Most of its contracts are multi-year (5 years or more), so predictability and stability of cash flows is above average here. Also, given its status as a proven incumbent, Maximus has serious advantages in both winning re-bids and new business. Maximus is the largest provider of health insurance appeals and one of the largest customer contact operators for health insurance exchanges. The company feels barriers to entry for new competition are rather high in this business.
Hold the Line
Maximus is clearly an attractive company, with solid growth, strong financial health, robust cash flows, and favorable business conditions for the foreseeable future.
But is the stock cheap enough? What we pay for a stock, echoes in our returns.
With a 8.6% earnings yield and a 20 P/E ratio, Maximus is not particularly cheap by Magic Formula® standards. And, indeed, assuming robust (15%) annual growth for the next 5 years and assigning a market average target earnings yield of 7% still nets me a fair value for the stock of just about $42 - right where it trades today.
Given this, I don't see Maximus as a great buy today. But this is one you can throw on the watch list and wait. Should the stock get into the low $30's or below, it could be time to unleash value.
