Government Payday

Part of the sweeping reform of America’s healthcare system under Obamacare was the expansion of Medicaid, the program that provides health insurance coverage primarily for America’s low-income workers. Twenty-eight states and the District of Columbia have expanded coverage so far, with three considering it and 20 opting not to. Those that have opted out are beginning to show signs of coming around, with both Indiana and Virginia now discussing expansions of their own.

Running those programs is an administrative nightmare, requiring both specialized systems and regulatory knowledge. That’s where Maximus (NYSE: MMS) comes in.

For more than 40 years now the company has been helping governments setup and operate programs such as Medicaid, Children’s Health Insurance Program and health insurance exchanges. Those programs typically generate about 65% of the company’s revenue with the remainder coming from consulting services on child support case management, improving educational systems and tax issues.

More than half of its revenue is tied to administering programs for state governments, many which are federally mandated and, as a result, are fairly stable income streams. That said, they tend to be performance-based contracts so the company’s performance has to be spot on, though there are usually incentive payments which provide additional upside for the company.

Another quarter of revenue comes from foreign government clients, including Australia, Canada, the United Kingdom and Saudi Arabia. Maximus is involved in a number of projects in those countries, ranging from health care administration to job placement programs.

Thanks largely to the growing plethora of health-related programs, in its fiscal third quarter revenue shot up by 26% on a year-over-year basis to $419.9 million.

Much of that was tied to new contract wins related to the Affordable Care Act. It also launched a new for the US Department of Education, administering collection efforts for nearly 5 million student loan borrowers who are in default. It also signed a deal in the UK to create a program geared towards transitioning employees who are on extended leaves due to health reasons back to work and in Australia to expand its job-matching services. In all, Maximus has signed new contracts worth nearly $1.1 billion so far this year with bids for another $3 billion in business still outstanding.

Earnings have also been growing rapidly, up 20% to 49 cents versus the same period last year.

The company’s shares are off by nearly 7% so far this year despite that impressive growth. While management expected full-year revenue to fall between $1.68 billion and $1.73 billion with earnings per share between $2.00 and $2.10, its outlook for fiscal 2015 is somewhat hazy.

While several more states are expected to launch expanding Medicaid programs over the next year, the lion’s share of that business is already up and running. As a result, it I tough to predict just how the company’s ACA business will pan out over the next year. A number of new contracts are also expected to generate some losses up front since they are pay-for-performance arrangements, though they should begin showing profits in fiscal 2016.

Despite the challenges the company will face over the next year, both earnings and revenue are still expected to grow by at least 10% and should kick back up to around 20% in the following year.

But thanks to the drifting share price so far this year coupled with its still-solid expected growth, Maximus’ forward price-to-earnings ratio has fallen from a high of almost 30 to just 19.6. At the same time, it pays a small but consistent quarterly dividend and repurchases its shares on a regular basis, buying back nearly 600,000 in the third quarter alone. Thanks to its high profit margins of about 14%, it funds both its repurchases and dividends from its $182.9 million in cash on the balance sheet with no net debt.

Since governments are essentially make-work programs for companies such as Maximus, especially as many states continue to push through privatization programs, this is an excellent opportunity to pick up the company’s shares on the cheap. There are also ample opportunities in foreign markets, particularly in the UK and Australia where efforts are underway to reform entitlement programs and control costs.

Considering that Maximus is facing a year of consolidation rather than a business slow down, this is a prime opportunity to buy a high-growth company on the cheap up to $49.