Maximus Should Benefit From Outsourcing of Health Benefits Work

 | Oct 18, 2016 | 9:00 AM EDT
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An aging population and the increasingly complex U.S. insurance system could be a boon for health services companies such as Maximus (MMS) , which handles administrative work for a variety of state insurance exchanges as well as Medicare and Medicaid.

The company based in Reston, Virginia, recently won back a big, $42 million contract to handle Medicare part A claim reconsiderations in 24 western states after losing it to a competitor two years ago. And a recent acquisition broadened its business of helping government agencies find the most appropriate nursing facility placement and treatment options for people receiving benefits.

The company says as government programs become more complicated, there is increasing demand for technology and data services, especially to manage the growing number of cases that need to be evaluated for placement in a proper environment.

For example, executives said in a recent investor presentation that Maximus has used its position as a Medicaid broker to win more business helping agencies assess applicants, such as in New York, where it helps the state decide eligibility for adult home and community-based long-term care and enrollment in a managed long-term care plan.

Maximus shares score highly on our model tracking the strategy of guru Peter Lynch, the former portfolio manager at Fidelity Investments who guided the Magellan Fund to a 29.2% annual return from 1977 to 1990. Lynch looks for stocks where earnings-per-share growth is in the range of 20% to 50%, with 20% to 25% being in the strategy's sweet spot, and Maximus is at 22.5% based on historic patterns using its three-, four- and five-year averages. My Lynch-based model gives the stock an 87 out of 100 potential points.

In addition, a growth-oriented model I run based on the legendary growth investor Martin Zweig gives the stock an above-average rating based on its earnings growth characteristics. While its annual earnings per share over the last five years have been a bit choppy (earliest to latest EPS are $1.16, $1.09, $1.67, $2.10 and $2.35), they mostly have been moving upward. Further, quarterly profit figures have shown relative improvement. This, combined with the firm's valuation, reasonable debt-to-equity of 30% and insider buying patterns, helps it achieve a decent score from the Zweig-based approach.

The shares have traded lower from their recent peak in August of $60.14, and closed Monday just below $54.

Analysts recently upgraded the shares on the outlook for continued growth in the outsourcing of government health programs. Maximus, which holds four big Medicare contracts, is in the process of opening a customer service center near Rochester, N.Y., that will mean the addition of 2,000 jobs. The expansion is related to more work for several health programs maintained by New York state, though the company said in August it will take some time for the effort to be fully in effect.

On the downside, Maximus recently lowered its sales projections to a range of $2.37 billion to $2.4 billion from a previous top outlook of $2.5 billion, largely because of the drop in the British pound following the U.K.'s vote in June to leave the European Union. Maximus has a contract in the U.K. to assess applications for health and disability benefits. This is something to keep on an eye on, particularly with the growth model mentioned above, but such a small decrease in expected sales should not be material to shares.

New contracts signed so far this year total $1.3 billion, with another $421 million in the process of being finalized. The company also projects a possible $4 billion of work up for grabs, about $1 billion related to contract renewals and about $2 billion in potential new business.

This small-cap name could be an interesting addition to one's portfolio based on its business model and fundamentals.

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