Shareholders of Maximus would probably like to forget the past six months even happened. The stock dropped 25.6% and now trades at $67.51. This may have investors wondering how to approach the situation.
Is now the time to buy Maximus, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free .
Despite the more favorable entry price, we're cautious about Maximus. Here are three reasons why you should be careful with MMS and a stock we'd rather own.
Why Is Maximus Not Exciting?
With nearly 50 years of experience translating public policy into operational programs that serve millions of citizens, Maximus (NYSE:MMS) provides operational services, clinical assessments, and technology solutions to government agencies in the U.S. and internationally.
1. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Maximus’s revenue to stall, a deceleration versus its 6.7% annualized growth for the past two years. This projection is underwhelming and indicates its products and services will face some demand challenges.
2. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Maximus historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 12.3%, somewhat low compared to the best business services companies that consistently pump out 25%+.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Maximus’s ROIC averaged 3.5 percentage point decreases over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Maximus isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 10.8× forward price-to-earnings (or $67.51 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. Let us point you toward a top digital advertising platform riding the creator economy .
Stocks We Like More Than Maximus
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