Stock Research and Analysis: Mastech Holdings (MHH) Part 2

Previously we looked at the business valuation of Mastech Holdings (MHH). To summarize, MHH is an IT staffing company in a competitive yet profitable industry. The macro environment has punished all staffing companies to the floor as companies continue to lay off people. MHH is a spinoff, a contrarian pick and a cheap stock all in one.

View the first stock analysis post on MHH. This post is all about analyzing numbers and valuation.

Spider Graph and Business Valuation Overview

MHH Spider Graph

Some opinions on the graph above

  • Low risk: With a strong and healthy balance sheet, the risk of MHH going bankrupt and investors losing their money is very small. Current national unemployment rate is at 9.4% and I believe the jobless rate will decline more than it will increase in the future. Note that I did not say in a couple of months or this year. I’m talking over 1 year to be safe.
  • High growth: Growth is dependent on the economy. Growth of job rates is the max it will be able to grow.
  • Undervalued: Big margin of safety from different valuations. Continue reading.
  • Well managed: In operation since 1986. Plenty of experience with the founders still running the company.
  • Good financial health: Very healthy. Strong balance sheet.
  • Strong moat: Shallow moat. Lots of competition. Anyone can enter the industry.

Financial Statement Analysis

Balance Sheet Analysis

  • Mastech has a healthy balance sheet
  • $1.55 in cash per share. i.e. 53% of share price is cash.
  • No intangibles (WOW! I like)
  • No long term debt
  • Current debt not a problem. Current ratio of 2.51
  • Net net value is $1.80 which means the company has lots of tangible assets making up the stock price
  • No drastic changes in cash, accounts receivables or other balance sheet items from the past 5 quarters to set off any alarms.

Income Statement Analysis

  • Gross profit margins in the 19% range. Good for a staffing company.
  • Cost of Goods Sold (COGS) is very high at 80+% but other competitors around the same size is also in this range. Obviously has to spend to attract employees and earn business. Visa processing and legal fees obviously costs a substantial amount per employee.
  • Small net profit margin of less than 4% average and 2.4% in the latest quarter makes it tough in bad economies.
  • No new issuance of shares

Statement of Cash Flows Analysis

  • Cash flow statement is clean
  • Has a bad debt of $258k from not being able to collect receivables. Some of its financial clients went bankrupt.
  • Generates positive cash from its operations. No need for debt. (Excellent)
  • Organically creates FCF. No need to use EBITDA to try and inflate their numbers (Excellent)

Overall the financial statements are very clean, the business looks to be running smoothly without risk of going bankrupt in this tough environment.

Fair Value Calculations

Discounted Cash Flow (DCF) Fair Value

First using the discounted cash flow method. We see that MHH has been able to generate FCF for the first time as a standalone company in one of the worst years ever. Their history also shows how they have been able to generate cash while being a wholly owned subsidiary of iGate. With this, I’m confident that they will be able to generate more FCF in the future as well.

So to make some assumptions, I’ll use my FCF value of $3.8 million, assume 0% growth rate for the next 10 years and then a terminal rate of 3%. These are very conservative figures. Apply a 15% discount rate, I could use 20% as well but I don’t need to fiddle with the numbers.

  • The DCF method gives me a fair intrinsic value of $9.40.
  • 50% margin of safety means the buy price is $4.70
  • 69% discount to current price of $2.90

Benjamin Graham’s Formula Valuation

This formula uses normalized earnings and with a 0% earnings growth rate, Ben Graham tells me that MHH is worth $3.77. If I were to apply a growth rate of 3.5%, which is basically the 10 year treasury rate;

  • the fair value would be $6.21
  • 53% discount to current price of $2.90

Net Net Working Capital Valuation

As I mentioned above, the net net value is $1.80.

When I calculate the net net value, I ignore property and all other assets except 100% cash, 75% of accounts receivables and 50% of inventories.

Multiples Valuation and Competitor Comparison

Competitors I am comparing that were mentioned in the annual reports:

  • Analysts International Corporation (ANLY)
  • Computer Task Group (CTGX)
  • TSR Inc (TSRI)

Other value and Magic Formula staffing companies:

  • Barrett Business Services (BBSI)
  • Manpower (MAN)

Looking at all these companies side by side, I can’t help but see how much better MHH is.

  • MHH PE is is at 3.6 while the average is 18
  • Price to cash flow is a low 3.26 compared to average of 12
  • Price to FCF is 1.86 compared to average of 5
  • EV/Revenue (TTM) is 0.06 compared to average of 0.13
  • Less of a decline in growth compared to all its competitors except CTGX
  • Financially stronger than most
  • Profitability is in line with competitors but profit margins are the best
  • Excellent ROA, ROE, ROIC. Much better than competition

On ALL counts MHH performs and executes better than its competitors yet it is trading at a PE of 3.6 and this is even after it ran up 50% or so following its 1st quarter results.

If I was to assume a multiple of 10, which is still conservative, the fair value comes out to $8. Note that I am using their latest EPS with this multiple. I didn’t even bother factoring in how their earnings will definitely increase.

Also, the spinoff price was at $9 which is in line with everything I’ve written here.

See all the numbers for yourself in the spreadsheet below.
MHH Competitor Comparison Spreadsheet


No brainer.


I hold MHH at the time of writing.

  • Tough to say much given how it doesn’t seem to have much financial data for past years. But then again, this is what creates opportunities for small investors… Some questions:

    Which is the market leader? Or is this industry very niche and/or fragmented?

    If MHH has no moat and is not supposed to be the leader (I don’t know I’m asking) then why does it have the highest profit margin? (If it doesn’t have any major advantages over others yet has a higher margin, it is possible that the margin will erode over time.)

    Sivaram Velauthapillai’s last blog post..Will be tough year for bulls & bears

  • MHH is a spinoff but they have been in operation since 1986. Although I don’t have the data for the past 20 years, I’ve checked the spinoff proposal documents which include financial statements for the past 3-4 years and the company has been consistent. Since many people won’t know this, it just adds to the opportunity.

    I mentioned in the first post that there is no market leader. As you mentioned, the industry is highly fragmented.
    I too find it interesting how MMH’s profit margins are the highest which means that they do have a competitive advantage. I just can’t pinpoint why. Is it because they have a 50-50 pool of H1-B and citizen contractors? I’m not fully sure but it’s something I’ll have to keep searching for.

    As for eroding over time, their profit margins have been good for quite a while. It could erode but it could easily increase in the industry they are in.

  • People were discussing my post on MHH and I decided to post an answer and wanted to post what I wrote here.
    The thread to the discussion is at
    This is Jae from Old School Value.

    Interesting discussion so I thought I would include my opinions.

    From the thread it seems like there are 2 sides.
    1. MHH is cheap compared to its intrinsic value and
    2. MHH is in a lousy industry which I dont want to be involved in.

    Two completely separate ideas so obviously no one is getting the answer they want.

    I dont invest in the auto industry because it just plain sucks. Ford (F) was incredibly cheap in the midst of the auto meltdown and had I not been so biased I would not have missed out on the 300% rally.

    So what I focus on in finding value everywhere. It’s not the super great businesses like KO, JNJ, PG or even AAPL that offer great returns. Everyone is looking for the high ROE, ROA, ROIC companies and probably hold it already. That’s why the price doesn’t veer away from its intrinsic value.

    It’s actually the companies with thin margins and thin ratios that explode if you have the stomach to hold on until things get better.


    Thin margins mean that a tiny improvement is seen as having a huge effect.

    With the massive bear market already well underway with everything thrown out the window, I see most of the bad things have been exposed already and everything has been dealt with accordingly.

    This brings me to MHH. Current unemployment is 10%. What would be worse for the business and stock of MHH?
    Unemployment rises to 12% or falls to 9.7%?
    If unemployment rates rise to higher levels, people already know its bad. MHH won’t take a huge hit.

    On the other hand, if news breaks out that the economic outlook is looking good. An unemployment rate of 9.7% is still ONLY 0.3% lower than 10% yet it will be perceived as HUGE news to the eyes of institutions and folks with money on the side.

    MHH has no long term debt, no off sheet liabilities, no red flags in their numbers. The industry is bad and if you are a macro investor, you would stay away, but for those that focus on businesses, and especially on good businesses that can survive the downturn easily, this is a no brainer.

    If you also compare MHH to its competitors, it has better numbers in all aspects.

    I detailed all the 10K risks already so it isn’t anything new or something I am not aware of.

    In the end however, it is your money. Stick to your discipline and what you are good at and we all end up happy. Not trying to convince anyone. There just seemed to be some misunderstandings between the people here so just adding some input.

    (think I’ll copy this and add it to my blogs comments section)


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