Maximus

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Maximus, Inc., is a government health and human services provider that partners with government agencies to design, develop, and deliver health and human service programs. They operate primarily in the U.S. and other countries around the globe.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Maximus’s business model is closely tied to government spending and public health programs, which provides a stable demand for its services and can be considered a moat from non-specialized competitors. Business Overview

Maximus operates through three segments: U.S. Federal Services, U.S. Services, and Outside the U.S.

  • U.S. Federal Services: This segment focuses on providing technology solutions and business process services to federal government agencies, including the Department of Veteran Affairs (VA). These services encompass systems implementation, program management, call center operations, and information technology.
  • U.S. Services: This segment primarily focuses on states and local U.S. government agencies, providing services related to program administration, assessments, eligibility services, and contact centers. Their services include support for programs like Medicare and Medicaid, child support, and employment assistance.
  • Outside the U.S.: This segment consists of contracts with foreign governments, including the United Kingdom, Australia, Canada, Saudi Arabia, Singapore, South Korea, Sweden, and other countries. They provide similar services such as government administration, case management, contact center operations, and employment services.

Industry Trends and Competitive Landscape

  • The government services market is relatively stable but competitive, due to the number of competitors looking to bid on government contracts.
  • The industry is driven by legislative and regulatory changes, as well as the need for governments to optimize the performance of the programs.
  • The market is seeing increased use of digital technologies and data analytics to modernize government operations.
  • The competitive landscape involves established players and smaller and medium-sized firms competing for government contracts.

Financials

The following are financial results for the fiscal year ending September 30, 2023:

  • Revenue: Total revenue for fiscal year 2023 was $4.96 billion, a 12.9% increase from $4.39 billion in 2022. All three business segments saw a jump in revenue. The largest jumps came from the U.S. and the Outside the U.S. segments which both saw increases of about 20% year over year.
  • Gross Profit: Gross Profit for 2023 was $1.19 billion, which was 15.8% more than the $1.03 billion in 2022, due to increases in the services delivered.
  • Operating Income: The company saw an increase of operating profit from $235.6 million in 2022 to $318.7 million in 2023. This 35.4% jump was due to a lower cost of revenue.
  • Net Income: Maximus reported net income of $205.9 million, compared to $79.3 million in 2022, a remarkable growth of 159.6%. This growth is attributed to a significant reduction in non-operating expenses year over year.
  • Cash flow: Free cash flow was at $170.8 million and cash provided by operating activities was $401 million. Cash on hand was reported at $191.1 million as of the end of their fiscal year.
  • Liquidity: The company has secured credit facilities, including a $1.1 billion credit facility with JPMorgan Chase.
  • Debt: The company has a mix of short-term and long-term debt and $1.18 billion outstanding. While the debt-to-equity ratio is not perfect, it is still relatively healthy.

As noted, the increased revenue in fiscal year 2023, can mostly be attributed to organic growth. However, they also expanded operations into new segments, such as technology and cybersecurity which are expected to continue to improve future performance. The company also had considerable increase in their contracts with the U.S. Department of Veterans Affairs.

Moat Assessment

  • Economic Moat: The company possesses a narrow moat (2/5) based on its specialized operations within the niche government sector, a stable source of demand from government contracts, economies of scale, customer retention, and some intellectual property. However, a large portion of its moat is also related to factors from switching costs, where customer lock-in and the cost of onboarding a new supplier can protect returns for a longer period of time, and these are only moderately strong.
    • Intangible assets - While Maximus has the benefit of name recognition within the government sector, they have little pricing power and their services are not so unique as to be irreplaceable. Therefore it does not provide significant moat protection.
    • Switching Costs - Governments take an extremely long time to adopt a new technology or make a change. Due to this, they do benefit from some switching costs as they are very rarely replaced. However, this is not a particularly strong moat on its own, since it will only delay replacement, not eliminate it.
    • Cost advantages - Maximus can leverage economies of scale in operations, which allows them to operate at lower costs than many competitors, resulting in high-margin operations. Additionally, they are in a position of advantage due to their experience in this market.
  • Moat Rating: 2/5 - Narrow. The company’s relationship with governments and established position provide them with some protection, but they lack a sustainable pricing power and have other competitors with similar advantages. The industry also involves a great deal of uncertainty with regards to changes in government spending.

Risks to the Moat and Business

  • Contract Dependence: A significant portion of Maximus’s revenue comes from a small number of major government contracts. Any issues arising on these contracts could be damaging to the company.
  • Government Regulations: The company is subject to various laws and regulations of the U.S. and other countries. This could lead to difficulty in implementing new systems and regulations, potentially reducing revenues.
  • Economic Conditions: Government spending can fluctuate with changes in the economy or budget deficits, impacting demand for Maximus’s services.
  • Contract Renewal: The possibility of not having contracts renewed by government entities.
  • Competition: Companies in the industry are highly competitive and may reduce potential contract opportunities and prices.
  • Cybersecurity: Due to a large part of the work the company handles having to do with sensitive government data, there is always a risk of data breaches that could damage the reputation and goodwill.
  • Labor costs: The company relies on qualified and skilled workers for its operations. Increase in labor costs may decrease the company’s profits.
  • Acquisitions: Difficulty in integrating the business it acquires. May cause lower than expected returns in the future due to poor management, culture mismatch, or bad financial decisions.

Business Resilience

  • The company has a long history of working with the government and a steady flow of revenue due to long term contracts.
  • Their core segments are essential government services, and the demand for their services is relatively stable over time.
  • They have a diverse geographic reach, reducing overall reliance on one country or market.

Understandability While Maximus operates in a somewhat niche market, its business model and services are not difficult to understand as a whole. How it generates its value, and the different segments it operates under are relatively transparent, and their operations and financials follow a clear strategy that makes them relatively easy to understand compared to tech companies for instance. Overall, its a company that does not have too many complex moving parts, so long-term growth can be easily judged without in-depth knowledge into their technical details.

Understandability: 3/5 - Moderately easy to understand.

Balance Sheet Health

  • Maximus’s balance sheet appears reasonably healthy. They are not particularly leveraged, do not have a history of losses, and are able to generate a healthy level of cash flow.

Balance Sheet Health: 4/5 - Healthy.

Recent Concerns/Controversies

During the Q4 2023 earnings call, the company made a few important announcements. They announced a five-year contract extension with the U.S. Department of Veterans Affairs, under which they are expected to provide “health and disability examination” services, which could potentially lead to revenue growth. In addition they made a $475 million strategic investment into a new platform.

The company also highlighted some struggles in other departments: The “M&A” pipeline for large companies has seen a decline. In addition, the operating margin for the “Outside the US” segment was lower year over year due to a decrease in performance in their Australia region, which the company hopes to address in the future.

While there were some concerns with the short-term, the company seems to be handling them well with future revenue growth expected. They also acknowledged that the company is taking longer to get their return on investment in R&D, while seeing a larger amount of costs associated with it, which may negatively impact the company’s future performance. Finally, they highlighted a potential uncertainty with their debt covenants.