Maximus Faces Short-Term Negative Newsflow

Feb. 25, 2015 9:29 AM ETMaximus, Inc. (MMS)7 Comments

Summary

  • Maximus has around 10% of its revenues coming from outsourced services in Australia.
  • These 10% of revenues roughly translate to 10% of its operating profit.
  • These revenues and profits are at risk due to short-term negative newsflow.

Thanks to Australian-based Bronte Capital, I've been made aware that Maximus (NYSE:MMS) is exposed to short-term negative newsflow which could have a visible impact on the share price and fundamentals.

Maximus is an outsourcing company providing business services to governments. It divides these services into two segments:

  • The Health Services Segment, which includes business and consulting services in the healthcare segment. This segment constituted 75.3% of Maximus' revenues in the 3 months to December 31, 2014. It also represented 77.2% of its operating income;
  • The Human Services Segment, which includes business and consulting services in several other segments, such as welfare, child support, etc. This segment constituted 24.7% of Maximus' revenues in the 3 months to December 31, 2014. It also represented 23.7% of its operating income.

(The contribution to operating income from both segments added together exceeds 100% because I did not consider overhead)

Maximus has been growing steadily and profitably, and is seen as a prime beneficiary of programs such as ObamaCare as well as a trend towards outsourcing which seems to be hitting the world over. The stock isn't overly expensive at 13.5x EV/EBITDA, given the underlying story and consistent growth and profitability including a 28% ROE.

Notwithstanding, the short-term newsflow is bad

As Bronte Capital explained in his blog entry, Australia is a significant part of Maximus' business. It accounted for 10% of Maximus' FY2014 revenues. This part of the Australian business falls into the "Human Services Segment" described above, and It is involved in outsourcing work for Australia's employment services, namely handling welfare recipients.

As it turns out, yesterday an Australian channel which would be equivalent to the British BBC did an exposé on exactly these outsourced services. And basically, in a way that was similar to what has been happening with the private education industry in the U.S., the exposé was ugly for the companies involved - alleging fraud and wrongdoing left and right.

Since the Australian contract is up for grabs later in the year, this particularly negative publicity at the very least stands to hit Maximus' Australian profitability. This profitability should at the very least be in line with the entire company's profit margin, so at least around 10% of the overall company's profits could be at risk.

It wouldn't thus be surprising if the stock quickly loses at least a visible fraction of 10% within the next couple of days. While this is short-term in nature, the potential fundamental impact is pretty clear.

Conclusion

A TV exposé in Australia calls into question Maximus' business there, a business representing 10% of Maximus' revenues and possibly around the same portion of its operating profits. Since this is new and unexpected information, it's likely that at least a significant portion of this now-at-risk business will be discounted by the market in the next few days.

Overall, this short-term impact which should be actionable from the short side if caught early might also lead to a buying opportunity later on, if the stock overreacts (that is, if it ends up falling more than 10% or so).

This article was written by

Paulo Santos profile picture
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Disclosure: The author has no positions in any stocks mentioned, but may initiate a short position in MMS over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The short sale opportunity here is short-term. If the punishment is too large it might turn into a long opportunity.

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