Maximus Makes Money On ObamaCare, Government Spending

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When someone is calling to apply for a health plan under the Affordable Care Act -- often called ObamaCare -- chances are a Maximus employee may answer the phone.

In addition, the contact center representative will also input and digitize the application, request any missing info, verify eligibility, help choose the plan and notify the managed care plan of the selection.

This is only a portion of the services that the Reston, Va.-based firm provides to states and governments worldwide.Maximus ( MMS ) also runs comprehensive services for the Children's Health Insurance Program (CHIP) and Medicaid, helps consumers access long-term care, assists students in managing their loans, and aids people on welfare in joining and remaining in the workforce.

However controversial the topic of U.S. federal spending and ObamaCare may be now, it represents a portion of business for Maximus, which has a long and broad history in getting work done with programs that many governments implement.

The company currently operates 300 offices in the U.S., Canada, U.K., Australia and Saudi Arabia. It employs 11,000 people, striving to provide localized services in developed countries with a favorable regulatory environment.

"Our mission statement is helping governments serve the people," said Maximus CEO Rich Montoni. "Unlike many of our competitors, we've done this for nearly 40 years. It's been our sole focus and I really think it differentiates us in the marketplace."

When Maximus manages a program for a government or state, it is the first point of contact as people apply for benefits. Its business units are health care and human services. Health care includes services for federal or state health plans. Human services helps the unemployed find and keep jobs. Such programs are underway in the U.K. and Australia, with a pilot program in the U.S .

Capitalizing On Government

In fiscal 2013, the company booked $1.3 billion in revenue, of which 65% was from health services and 35% from human services. Three-quarters of the revenue came from the U.S., with the rest generated internationally. Maximus expects total revenue of $1.6 billion to $1.8 billion in fiscal 2014.

Besides its two federal health insurance marketplace call centers, Maximus counts the most contracts of firms providing services to state health insurance exchanges. It manages those programs in eight states and the District of Columbia.

It has a very large presence in Medicaid programs. "One out of every two Medicaid managed care beneficiaries are served by Maximus," said Charles Strauzer, senior managing director at CJS Securities.

The Affordable Care Act program is expected to yield over $200 million in annual revenue, said Montoni. Government and state contracts are usually multiyear and include another three to five option years. As a result, revenue is highly predictable over many years.

Several players are in the space, though none are pure-play companies like Maximus.

Competitors includeFTI Consulting ( FCN ),Korn/Ferry International ( KFY ) andICF International ( ICFI ), which vaulted more than 20% in the stock market Thursday on a well-received earnings report it delivered Wednesday afternoon. While its federal and state businesses declined slightly, ICF cited education, public health and international health survey research as "growth areas" in its report.

When picking which company to award a contract, "a lot of weight is placed by the governments on the vendor's ability to get the job done, the reliability and the dependability," said Montoni. "Maximus, having been in this business for quite some time, I think we've done a very good job to build that reputation and I think it benefits us significantly in the marketplace."

The market is also trending more toward performance-based compensation. "They get paid based on volumes, call volumes, mailings, number of applications they process, number of people they enroll," said Strauzer. "On the human side, it's placement rates, longevity of placement ... retention bonuses."

ObamaCare Bump

Maximus' sales pipeline, consisting of sales opportunities that it is tracking both in the U.S. and abroad, stood at $2.4 billion at the end of December. The company signed $347 million in awards year to date through December and had $50 million in new contracts pending final signature.

It saw a higher level of activity in its health exchange market services the last six weeks of 2013 as more consumers than expected sought help via its contact center, due to technological difficulties on the Healthcare.gov website. ObamaCare implementation issues have been widely reported in the media.

This helped propel Maximus' first quarter of fiscal 2014 above guidance and analyst forecasts. Sales for the health services segment surged 70%, while human services revenue was down 3%. All in all, revenue soared 42% to $407 million. The health segment's operating margin also outpaced expectations.

Earnings per share jumped 55% to 48 cents, marking a sixth consecutive quarter of double-digit growth and acceleration in the past three quarters. Maximus raised fiscal 2014 guidance, based on the stronger-than-expected first quarter, greater scope of work on several contracts supporting rollout of ObamaCare and improved forecasts in other service areas.

Student Debt Deal

Maximus also recently announced that it finally was awarded a contract by the U.S. Department of Education's Office of Federal Student Aid to manage a program helping with debt and collection management of student loans.

The award was originally protested by another bidder, but both firms reached a negotiated solution: The protester will perform certain services as a subcontractor under Maximus. Earnings and revenue guidance for 2014 remain unchanged.

"There is a high degree of concern that many students have borrowed a lot of money, and while they are obligated to repay these loans they have not received the job opportunities they anticipated," said Montoni. He notes that the amount of debt is expected to reach $1 trillion shortly.

As with any business, there are always certain risks. One of them, says Strauzer, is that government can change its mind or be prone to political pressures, alter its department structure or the course for certain programs, requiring renegotiation of contracts. The timing and size of funding also plays an important role, as most programs are federally mandated and budgets can change.

There is also operational risk in building out systems, especially if they don't work consistently. Maximus has an advantage in that it is less involved in the technology side than the contact center side. Finally, in human services, compensation is often based on longevity of worker placement. If workers don't stay in their jobs a long time, there could be a loss in revenue.

Maximus management has a strong track record. CEO Montoni has made improvements and streamlined the business in the past seven years. Chief Financial Officer David Walker is retiring, but plans to stay until a replacement is found.

The company pays a quarterly dividend and pursues opportunistic share buybacks. It's staying open for future add-on acquisitions. Its cash flow and balance sheet are solid, with no debt. "You've got a company that's got a very high visibility outlook, with strong growth in front of it," said Strauzer.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: MMS , FCN , KFY , ICFI

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