Summary:
On October 17, 2024, Maximus (NYSE: MMS), a global provider of government services, announced its selection for a Blanket Purchase Agreement (BPA) with the Internal Revenue Service (IRS) for non-IT consulting services
Incremental revenue is estimated to be $4.98 per share, leading to a projected price estimate of $95.08. Our multiples-based approach signals a slightly higher estimate of $97.00 per share.
We initiate our coverage with a "buy" recommendation and a price target of $96.00, representing an upside of 7.11% at the time of publication.
Catalyst
On October 17, 2024, Maximus (NYSE: MMS), a global provider of government services, announced its selection for a Blanket Purchase Agreement (BPA) with the Internal Revenue Service (IRS) for non-IT consulting services [1]. The BPA, which is a multiple-award agreement, has a five-year period of performance, enabling Maximus to compete for task orders with a combined ceiling of $300 million [1].
Outline of Analytical Framework:
We analyze the potential impact of the press release by estimating the per-share revenue contribution from the award. First, we calculate the additional revenue generated from the $300 million contract cap and determine its impact on a per-share basis using the company's total outstanding shares. Next, we assess MMS's pre-disclosure price-to-sales (P/S) ratio as a reference multiple. By applying this multiple to the newly adjusted revenue post-award, we derive a range of potential valuations for the stock.
Revenue: Direct Approach
Under our direct approach, we assume the award will materialize in the company’s financials as a direct increase in revenue. Specifically, we project an incremental revenue of $300 million in our base case, assuming the contract reaches its full potential. We also account for the possibility of lower revenue realization at the end of our analysis. According to the latest 10-Q filing, there were 60,177,003 shares of the company’s common stock outstanding as of August 5, 2024 [2]. This results in an estimated incremental revenue of approximately $4.98 per share. Based on the pre-disclosure closing price of $90.09 (as of 13:00:00 EST on the day of the disclosure), our analysis suggests a price estimate of $95.08.
Multiples Approach
Based on the historical revenue for the fiscal year ended 2023 and the outstanding share count, we estimated the pre-disclosure price-to-sales (P/S) multiple to be approximately 1.12x revenue per share [3]. Using a base case assumption of a $300 million contract size, we project an accretion in revenue per share—taking into account the company's share repurchase program—of $86.49 per share. Assuming a constant sales multiple post-disclosure, the price per share reflecting this new information is estimated to be $96.91, slightly higher than our previous direct approach.
Other Considerations
So far, we have assumed that the full contract size will materialize and be reflected as increased revenue for the company. While this is the ideal scenario, we must consider the possibility that the $300 million represents only the contract’s ceiling and may not be fully realized. Additionally, we've assumed a constant P/S multiple both pre- and post-disclosure. To account for these uncertainties, we present the following table for a more dynamic approach to our analysis.
Given the likelihood of revenue expansion from the awarding of the contract, we believe that the post-disclosure price-to-sales (P/S) multiple will remain above the pre-disclosure level of 1.12x.
Source:
[1] Press Release: Maximus Named to $300 Million IRS Consulting Services Blanket Purchase Agreement | Business Wire
[2] Latest Quarterly Filing : EDGAR Filing Documents for 0001032220-24-000075 (sec.gov)
[3] Latest Annual Filing: EDGAR Filing Documents for 0001032220-23-000096 (sec.gov)
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