Should You Buy It? Maximus to the Max
David Peltier
12/13/07 - 06:14 AM EST
Some investors who were hoping for a sale of
Maximus(MMS) recently may end up pleased the consulting company didn't go that route.
Maximus, which said Nov. 14 that it had completed a four-month strategic review with UBS as an adviser, originally considered selling some or all of its assets. But it ultimately decided to undertake a $150 million accelerated share-repurchase program, which is expected to add about 25 cents a share to annual earnings.
In addition to the repurchase, the company announced it will consider strategic alternatives for its non-core IT services and consulting divisions while maintaining its operations segment, the fastest-growing business. This division outsources services to government agencies in health and human services programs and generates about two-thirds of total revenue.
At Wednesday's closing price of $39.25, the stock is off 19% from its 52-week high. That is 14.3 times expected fiscal 2008 (ending September) earnings of $2.73, which is a 5% discount to the
S&P 500.
With that in mind, I'm here to answer the question: Should you buy it? Does Maximus offer value at current levels, or will investors look elsewhere now that the entire company is no longer for sale?
The company said that the accelerated share repurchase will not affect its previous $40 million buyback program. Management said it still plans to complete the program over time. Maximus ended the September quarter with $196.7 million of cash on the balance sheet and no debt. Additionally, the company returns cash to shareholders through its 10-cent quarterly dividend (1% yield).
Maximus also announced solid fiscal fourth-quarter results Nov. 14. The company earned 68 cents a share, which was 3 cents ahead of expectations. Revenue grew 17.5% year over year to $201.9 million.
Credit CEO Richard Montoni, who took office in April 2006, for Maximus' new strategy and growth outlook. His goal is to shift the company away from growing revenue at all costs toward more -- and smaller -- contracts (under $50 million) that usually carry higher margins.
Maximus is targeting $850 million to $880 million of revenue for next year, including 15% to 20% organic growth. Because of the visibility of its government contracts, Maximus estimates that 83% of expected 2008 revenue is already booked into the backlog.
Even if some spending is cut because of depressed local government budgets, about 70% of the company's sales come from federally mandated programs.
Maximus shares are up more than 27% year to date, but I continue to believe that it offers value at current levels. While failure to sell the entire business was a near-term disappointment to some investors, I believe that focus will shift toward the company's impressive top-line growth and improved profitability in its core outsourcing business.
