▶ Full Post Text
I've been digging into Maximus (MMS), a \~$3.3B government-services company trading near the low end of its multi-year valuation range. The market is treating a one-time cash-collection delay as if the earnings power broke. I don't think it did, and I've been buying.
**what they do**
Maximus runs the unglamorous plumbing of government. They administer Medicaid and Medicare eligibility, operate federal and state contact centers, and modernize digital systems for health and human services agencies. Think outsourced back office for programs that don't disappear in a recession. Revenue is roughly 58% U.S. federal, 31% U.S. state, 11% international. Contracts are long and recurring, and the ultimate paymaster is the government, so credit risk is close to zero.
**why the stock is cheap**
Two things spooked people. First, revenue dipped about 4% year over year because they were lapping a big prior-year bump of natural-disaster and clinical-surge work. Second, and more important, days sales outstanding spiked to 78 days when one large federal customer had a retroactive invoicing snarl. That pushed roughly $188M of cash into receivables and hammered trailing free cash flow. Headlines read "revenue down, cash flow down," and the multiple compressed to around 10x.
**why I think the market is wrong**
The receivable is from a funded federal contract. It's a timing issue, not bad debt. Management guided full-year free cash flow of $450M to $500M and expects DSO back below 70 days by year-end. Underneath the messy headline the business is improving: gross margin is 23.83% against a 5-year average of 20.66%, operating margin is 10.81% against 8.47%, and ROIC recovered to 11.62% against a 9.27% average. That margin expansion comes from AI and automation in the contact centers, which decouples labor cost from volume. A structurally declining business does not expand margins while raising full-year EPS guidance.
**earnings**
The key adjustment is adding back the temporary $188M working-capital drain, because it's a collectible government receivable, not a recurring cost.
|line|amount|
|:-|:-|
|operating cash flow|$411.78M|
|less: stock-based comp|\-$38.53M|
|less: maintenance capex (5yr avg)|\-$82.13M|
|add back: one-time receivables drain|\+$188.36M|
|normalized earnings|$479.48M|
|per share (54.81M shares)|$8.75|
Be honest about that add-back: it's the whole ballgame. Strip it out and earnings are about $291M, or $5.31 a share, on artificially depressed cash flow. The reason I trust the higher number is that management's own $450M to $500M free-cash-flow guide brackets it, and the receivable is federal. If DSO normalizes, $479M is the run rate. If it doesn't, I'm wrong, and I say so below.
quality snapshot
* 5-year earnings growth
* capex just 1.54% of revenue (software and call centers, not factories)
* $59.1B tracked sales pipeline
**the balance sheet**
This is the blemish. They carry $1.63B of total debt against $244.7M of liquid assets, so net debt is about $1.38B, or -$26.04 per share. Leverage fails a strict debt test at roughly 5.6 years of earnings, and there is no asset protection (net current asset value is negative). So this is an earnings-power bet, not a balance-sheet bet, and I account for it by subtracting the full net debt from intrinsic value instead of hand-waving it.
**capital allocation**
Management is acting like owners. Over the trailing year they put about $296M, roughly 62% of owner earnings, into buybacks while paying a $69M dividend, and the board just refreshed a $400M repurchase authorization. They bought 1.4M shares near $111M and another 600k around $40M this spring, at prices well below what I think the business is worth. Shrinking the count at a discount to intrinsic value turbocharges per-share economics.
**valuation**
|Line|Amount|
|:-|:-|
|earnings per share|$8.75|
|multiple|15x|
|business value|$131.25|
|net cash per share|\-$26.04|
|intrinsic value|$105.21|
|current price|$62.21|
|margin of safety|\~41%|
I use 15x because the cash flows are government-backed and predictable and the returns on tangible capital are high. If you want to be tougher, 12x still gets you about $79 a share, so I'm not leaning on a heroic multiple. On an enterprise basis, including the net debt, you're paying roughly 10x normalized owner earnings.
**what would make me sell**
The receivables drain turning out to be permanent. If DSO stays above 75 days and they miss the $450M to $500M free-cash-flow guide, then the right owner-earnings number is closer to $5.31 than $8.75, and the stock is roughly fair rather than cheap. That's the pivot I watch every quarter.
The other real risk is policy. This is government revenue, so Medicaid or Medicare budget cuts, or losing a large recompete like the upcoming Veterans Benefits Administration contract, would genuinely dent volumes. That is why I want a wide margin of safety and would not size it like a fortress balance sheet.
**where I land**
A high-return, asset-light franchise getting priced like a broken one over a cash-timing issue that management is already guiding to resolve. Margins are expanding, the buyback is aggressive and accretive, and I'm paying about 10x normalized owner earnings including the debt. I hold a position and have been adding. It is not a fortress, the debt is real, so this is a business-quality and mispricing bet, not a Graham net-net.
Disclosure: I hold a position in $MMS. Hard data from filings, AI-assisted writing, personal review and position. This is not financial advice. [https://youtu.be/HM1WvAOsR5I?si=aoGMWzMgpLXfwAMl](https://youtu.be/HM1WvAOsR5I?si=aoGMWzMgpLXfwAMl)