Description

MAXIMUS is a high quality, growing company trading at a significant discount to the general market. The stock is off nearly 30% from its 52-week high due to reduced earnings estimates. The company should still be able to post 15% gain in share earnings for fiscal 2002. And given the company's likelihood of 10%+ earnings-growth rate for the next few years the stock should be trading significantly higher than it currently does.

Company Description:

MAXIMUS is a provider of program-management, consulting, and IT services
to state and local governments. It has been profitable every year since it was founded in 1975, and is the largest company of its kind (excluding companies that provide such services to the federal government).

Governments use MAXIMUS to administer their welfare (e.g., Medicaid and Food Stamps) and healthcare programs as well as for consulting services, which help them get the maximum allowable federal funding. The company's earnings are generally equal to free cash flow. Since it customers are governments it receivables are solid - it has never report a single bad debt.

Explanation of the Drop in Stock-Price

Wall Street analysts got it into there heads that the company was 100% non-cyclical. This isn't the case. The company is affected by pressures in state budgets. Goventments will delay some consulting work or IT upgrades during recession. And, increased welfare and unemployment during a recession lowers the company's margins somewhat, despite the fact that many of its contracts include provision for more money as caseload increase.

Supply and Demand Dynamics:

State budgets almost grow ever single year due to growing populations.
And the welfare/healthcare part of the state budgets tend to grow
faster than the whole due to an aging population as well as expansion of the welfare state. Governments have increasing used outsourcing for such programs because private firms are able to perform them better and do the for a lower cost. The combination of both trends (large government and outsourcing) shouldn't make it difficult for companies like MAXIMUS to expand their revent faster than most business.
MAXIMUS's Competitive Advantages

MAXIMUS's status and one of the most experienced and it large size allows it to more profitably bid and successfully fufill contracts for governments. In large states, like California, MAXIMUS is sometimes the only bidder on a contract because most of its peers are just too small to perform such work. And many times when it has lost a big contract the company is often re-awarded it after the new company fails to meet its contractual requirements.

Valuation

Maximus is trading at 16.5 times the current earnings estimates ($2.15 a share) for fiscal 2002. That said, after excluding for the company's excess cash on the balance sheet ($5 a share) the stock trades at just 14 times 2002 estimates (ex the earnings on the cash).
This company, which derives it revenues from non-cyclical sources and has grown its earnings at nearly 20% for the past five years, should trade at a premium to the S&P, not a discount.

Twenty to 25 times earnings in the current market environment is a very reasonable multiple for such a company. Using those figure, and adjusting for the excess cash, the stock fair value is between $48 and $59 - 37% to 69% higher.

Risks

The company has been pursuing more fix-price contracts lately. While these are generally more profitable that cost-plus contracts they do expose the company to added risks. In the past few years, however, the company has never been significantly impacted by this factor.
Government employees and unions aren't MAXIMUS's best friend. They have lobbied against oustourcing for obvious reason. Although this has been a occasional negative, governors and mayor of both political parties find it expidient to go with the lower-cost option of outsourcing.

Catalyst

The end of the current recession should help since government expenditures generally grow even faster during times of economic expansion.