MAXIMUS, INC. (MMS) stock intrinsic value fair value estimate & owner earnings analysis

Maximus runs the administrative machinery of large government programs under contract. About 55% of revenue comes from U.S. federal agencies. The largest profit engine there is the Department of Veterans Affairs medical disability exam (MDE) program, run through the VES subsidiary bought in 2021. About a third of revenue comes from U.S. state governments, chiefly Medicaid and CHIP enrollment and eligibility work. The rest comes from the United Kingdom and Canada, following the fiscal 2025 sale of the Australia and Korea businesses. How we measured earnings. We start from the cash the business generates for owners: operating cash flow, stripped of working-capital swings, less stock compensation and the capital spending needed to keep the business running. The company carries meaningful debt, so we add back the $80-90 million of interest it pays each year. That gives the cash the business itself produces before its lenders are paid; we value that and subtract the debt at the end. On that basis the business produced about $331 million in fiscal 2022, $311 million in 2023, $372 million in 2024 and $500 million in 2025. We anchor on the average of fiscal 2024 and 2025, about $436 million a year, or roughly $8.22 per share on today's 53.1 million diluted shares. Fiscal 2022 and 2023 are left out. In those years the business was still integrating VES, losing its pandemic work and absorbing higher labor costs during the Medicaid eligibility-review ramp. The VA incentive pause, and what it is actually worth. From July 1 through December 31, 2026, the VA has paused both the performance incentives and the penalties on its MDE contracts for every vendor while it reworks how exam quality is reviewed and validated. Maximus says these incentives were worth about $0.35 per share in each of the first three quarters of fiscal 2026, about $74 million a year after tax. Management also says they were a bigger contributor in 2026 than in earlier years. So the 2024-2025 earnings we anchor on contain much less incentive income than 2026 did. As a cross-check, we took the company's reported adjusted earnings for the first three quarters of fiscal 2026 and stripped out the incentive amount the company itself quantified. That leaves earning power of about $446 million a year before interest, slightly above our anchor. Operating cash flow cannot confirm this for 2026 because of the receivables build described below, so it is used only as a check, not to set the level. The conclusion matters: losing the incentives by themselves would not pull the business much below our anchor. The company does not disclose how much incentive income 2024 and 2025 contained. Even if we strip about $20 million a year from the anchor to allow for it, the central value falls only about $5 per share, to about $92. The real risk is broader: what the VA does with pricing and volume when the MDE contracts are rebid. The rebid. The current MDE contracts run through December 31, 2026, and the company expects an extension of up to six months. The VA's draft work statement, released in August 2026, covers all six regions Maximus serves today, with the scope of work unchanged, and envisions a new base contract starting around mid-2027. It does not disclose pricing or incentive terms. The domestic regions are a multi-vendor arrangement: in January 2025 the VA placed four providers on the regional contracts, Maximus's VES, Leidos's QTC, Optum and Loyal Source. Exam volume can therefore shift between vendors as well as be repriced. Cash and receivables. Operating cash flow was negative $180 million over the first nine months of fiscal 2026 because one large federal customer slowed payments, and receivables rose to $1.38 billion (about 98 days of sales). The same nine-month pattern occurred in fiscal 2025, when cash flow was negative $220 million at nine months and $429 million for the full year. About $245 million had been collected by early August, so we treat this as timing, not lost earnings. Growth check. Business cash flow grew 34% in fiscal 2025. Our central case starts fiscal 2027 about 2% below the anchor because the pause runs into its first quarter. The debt. Maximus owes about $1.65 billion of floating-rate bank debt: a term loan maturing May 2029, a term loan maturing May 2031, and a $750 million revolver. Covenants cap net leverage at 4.0 times EBITDA and require interest coverage of at least 3.0 times; the company reports net leverage of about 2.0 times. After crediting the $245 million of delayed receivables already collected, we subtract about $1.405 billion, or $26.48 per share. The roughly $57 million of cash on hand is treated as needed to run the business. The loans cost close to 6% today, so no rate adjustment is made. Central case: Maximus keeps its MDE regions in the rebid on economics similar to those already built into our anchor. The business holds about $455 million a year from fiscal 2028, which includes about $20 million a year from the federal law signed in July 2025. That law starts Medicaid work requirements and twice-yearly eligibility checks for the expansion population on January 1, 2027. A court has declined to halt it, and Maximus says some existing state contracts have already been cleared to ramp up. No other growth is credited: the $50 billion sales pipeline, new AI tools and federal modernization work are hopes, not contracts. The trailing book-to-bill is only 0.5. That is partly offset by $1.35 billion of contracts awarded but not yet signed, mostly renewals, so flat is the honest median. We hold that level for 30 years, based on the company's long record of renewing government administration contracts, then fade it to zero over the following decade. The business is worth about $6.53 billion; less $1.405 billion of debt leaves $5.12 billion, about $96.53 per share. Weak case: the rebid goes badly. The successor MDE contracts carry no incentive economics, and VES loses exam volume or pricing to the three other approved vendors. We size this at about $74 million a year after tax below the anchor. That uses the incentive amount as a measure of how much program profit the VA has shown it can switch off. The low book-to-bill turns into steady attrition of 2% a year for a decade and 3% a year after that, the Medicaid rules are delayed by state exemptions or handled by others, and the story ends after 25 years. Even at its low point this case earns about $191 million a year, more than twice its interest bill. The business is worth about $3.79 billion; less $1.405 billion of debt leaves $2.39 billion, about $45.02 per share. Strong case: incentives resume in January 2027 as the contract change states, the successor contracts keep them, and Maximus keeps all six regions. The business returns to its demonstrated fiscal 2026 earning power with incentives, about $520 million a year, plus about $40 million a year from the Medicaid changes, and holds it indefinitely. The business is worth about $9.29 billion; less $1.405 billion of debt leaves $7.88 billion, about $148.51 per share. Margin-of-safety price and the condition attached to it. Most of the distance between the weak and central cases comes from one event: the MDE rebid outcome, expected around mid-2027. Without knowing it, the shares would need to trade in the mid-$40s for a 20% return to be reasonably supported, because the weak case alone would eliminate any margin above that. Once Maximus confirms it has won the successor contracts in its current regions without a cut to its outlook, the worst evidenced outcome becomes ordinary attrition elsewhere in the business. That outcome is worth about $60 per share (a $4.57 billion business less $1.405 billion of debt). The margin-of-safety price is $60 once that is true. At that price the worst case implies roughly break-even plus a 2.5% dividend, and the central value of about $97 implies a 20% annual return if the market recognizes it within about three years. Accounting notes. About $80-90 million a year of amortization on acquired contracts (mainly VES and the General Dynamics health unit bought in 2019) is added back as a non-cash cost. Those acquired contracts are short and rebid often, so their decay is carried in the flat central path and the eroding weak case, not ignored. Fiscal 2025 cash flow includes the add-back of a roughly $40 million non-cash loss on the Australia/Korea sale. That loss reduced reported profit but used no cash, so adding it back does not inflate cash earnings. Litigation over the 2023 MOVEit file-transfer breach is still pending, and no loss is assumed. What changed. Our previous analysis (September 28, 2026: $47.25 / $96.57 / $142.01, margin-of-safety price $62) described the weak case as the permanent loss of the VA incentives. On closer review, our earnings anchor carries only a small part of the incentive income Maximus earned in 2026. Losing the incentives alone is therefore a modest hit; the weak case is really about the rebid going badly on volume and pricing, and we now describe it that way. The strong case rises because fiscal 2026 showed what the business earns with full incentives. The bigger change is the margin-of-safety price. $62 sat well above the weak case with nothing to show which way the rebid will go. We now tie the margin-of-safety price to the rebid outcome and set it at $60, the level that still works if everything else disappoints. What would make this wrong: losing MDE regions or volume share, or harsher pricing, in the rebid; federal payment delays that turn out to be something other than timing; or state Medicaid work proving smaller than even our modest assumption.