Maximus Maximizing Shareholder Value (News) October 27, 1999

Maximus Maximizing Shareholder Value

By Richard McCaffery (TMF Gibson)
October 27, 1999

There aren't many fast-growth technology firms focused on the government sector, but small-cap company Maximus Inc. (NYSE: MMS) is blazing a trail.

From 1996 to 1998, the McLean, Virginia company grew revenues 72% to $233 million. The company should top $300 million in sales this year and is on track to grow earnings 36%. Its long-term growth rate is projected at 29%, according to IBES International. This is swift growth for a company focused on selling services to state and local governments.

With this in mind, consider yesterday's announcement that Maximus plans to repurchase 1.5 million shares of stock, which represents about 7% of its 21 million outstanding shares. Maximus' stock has fallen sharply since September, spurred, in part perhaps, by insider selling.

Now, just because insiders are cashing in on some of their hard work doesn't mean a company's in trouble. In fact, unless there's strong evidence to the contrary, investors shouldn't assume insider selling means bad news. More on this in a bit.

Founded in 1975, Maximus provides state and local organizations with health and human services program management and consulting services. One of the cool things about Maximus is that it's tucked away in a corner of the information technology sector that nevertheless offers excellent growth potential.

Maximus helps states and localities administer social welfare programs at a time when vast numbers of public sector organizations are looking to outsource these hefty services. Maximus helps agencies enforce and collect child support payments, provide job readiness and retention programs, and administer disability and managed care enrollment services. It also offers a wide range of IT consulting.

Needless to say, the Welfare Reform Act of 1996 is driving growth. Federal, state, and local agencies spend more than $250 billion annually administering social welfare programs, according to Maximus, and the company targets its services right at the heart of this substantial market. State agencies alone spend more than $21 billion. This leaves plenty of upside for revenue growth, especially since agencies are increasingly turning to outsourcing as the demand for better services grows faster than spending budgets.

Although the company operates in a niche, there is tough competition. Large systems integration companies such as Lockheed Martin (NYSE: LMT) and Electronic Data Systems (NYSE: EDS) offer similar services and are extremely focused on the private sector. But Maximus' specialization -- and 24 years of experience honing its health and human services skills -- is noteworthy.

In light of yesterday's announcement, management obviously thinks the stock represents a good value at a price-to-earnings ratio of 18, a nice discount to its historical and expected growth rate. A closer look shows they might be right.

Fears about insider selling don't look justified after a review of the company's latest financial statement. For the quarter ended June 30, Maximus had almost $90 million in cash and marketable securities, just $1.4 million in long-term debt, and plenty of working capital.

It generated $15.6 million in cash from operations through the first nine months of the year, while spending about $10 million on real estate, property, plant, and equipment. This leaves the company with almost $6 million in free cash flow for worthy activities like stock repurchase programs. Finally, the company's return on average shareholder's equity, a measure of how effectively it employs its assets, hit 19% last year. Many companies struggle to hit 15%.

Though the public sector may not be a sexy market, U.S. localities pay their bills, and multiyear contracts represent a steady stream of revenue. Maximus could be worth a second look.

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