The Value Investing Blog

Empowering value investors with stock valuation tools, tutorials and resources

Value Stock Mastech Holdings (MHH) Update

August 27th, 2009

21 Comments

Mastech Holdings (MHH) released their 10-Q on Aug 14 which I found to be very good..

A lot of the numbers and financial details are similar to what I wrote previously on MHH so in case you missed the first stock analysis of Mastech Holdings (MHH), here’s why I like MHH.

  • Not many people know about it
  • It’s a spin off and dropped like a rock from $9 down to $1 as institutions couldn’t hold it
  • Unemployment is close to an all time high and in an industry filled with uncertainty and fear
  • High insider ownership, maybe too high, but it aligns interest of insiders and shareholders
  • Excellent numbers compared to bigger competition
  • Still continues to make hard, cold and raw FCF despite a horrible economy

Spider Graph Overview

MHH spider graph

MHH spider graph

After reviewing the 10-Q, nothing much has changed in the business. Still chugging along making cash and is in excellent health and very undervalued.

Discussion

As I mentioned, the state of the company doesn’t differ much from last quarter. MHH was able to make money last quarter and the “-77% drop in revenues” in the news is mere noise and more chance for me to buy as others freak out and sell.

Every company performed terribly against the highs of the first half in 2008 which makes the yoy comparison useless. On the flip side, when the economy gets better and MHH with it, Wall Street will be comparing the company with the worst year which will make any quarterly result look good.

One excellent analysis method I learnt from F Wall Street was that when analyzing the business, it’s important to look at the company over multiple instances rather than with year over year results. This is because all businesses will encounter cycles due to the industry or other macro factors.

Back to MHH.

  • Very strong balance sheet. Can definitely survive this economy. Current ratio of 2.8
  • Increased cash & equivalents to $6.9 mil which is $1.91 of cash per share. Increased from $1.55 in the previous quarter.
  • No intangibles or long term debt
  • Net net stock value increased to $2.02 from $1.80 last quarter
  • Steadily churning FCF quarter after quarter. It’s not in huge leaps and bounds but enough to allow the intrinsic value of the company to grow.

DCF Valuation

Using 0% growth, 15% discount rate and without even bothering to adjust for a downturn in the business cycle, MHH still looks to be worth around $9.

Remember that the spin off price was also $9.

Ben Graham Formula Valuation

I recently made changes to the way I calculate normalized earnings in the Benjamin Graham formula spreadsheet, so it now produces a conservative and more ideal normalized earnings. (Once I have tested it enough, it’ll be included in the next major release I am working on which will include Earnings Power Value EPV)

The worst case scenario where MHH has $0 EPS and 0% growth leads to an ultra conservative value of $1.42.

By adjusting earnings slightly, a realistic number is in the range of $7.

Net Net Working Capital – Downside Protection

Net Net Working Capital value went from $1.80 to $2.02 this quarter. Something good is going on in the company.

NNWC MHH VOL

(click to enlarge)

Competitor Comparison Analysis

Another similar company getting a fair amount of attention and movement is Volt Information Sciences (VOL). Although there are some differences, you have to take a look at MHH and VOL side by side to see how much better it really is. So if VOL is able to move up so quickly with some attention, I see MHH doing much better if Mr Market can notice what a mistake he is making.

Based on a multiples method of valuation (PE, cash flow, sales, enterprise value and others) MHH fair value is at $7.

Not a huge grand slam but still a potential homerun nonetheless. Just not sure about how quickly it will be realized.

MHH Competitor Comparison Analysis

Disclosure

I own shares of MHH at the time of writing

About Jae Jun

Jae Jun has written 528 value investing articles.

Jae is the founder of Old School Value and has a mission to empower every investor by providing tools, tutorials and educational material so that they can invest successfully on their own.

Recent posts by Jae Jun

You may also like:

  1. Value Stock Mastech Holdings Misunderstood
  2. Stock Research and Analysis: Mastech Holdings (MHH) Part 2
  3. Stock Research and Analysis: Mastech Holdings (MHH) Part 1
  4. Mastech 2009 Year End Update
  5. Graham Deep Value Stock Review: XOHO Holdings (XOHO)

Value stocks in 30 seconds with the stock valuation spreadsheets

  • Susan Zheng

    Thank you for the update, Jae. It is very convincing.

  • Texas

    I wasn’t sure where to post this but I wanted to tell you that I bought your spreadsheet and I am very satisfied with it. Thank you!

    Here’s a suggestion:
    In the DCF Valuation section for margins and ratios, you can add a conditional statement to get rid of #!Value and #Error results.

    Cell b27 for example calculates Gross Margin with this formula:
    =b11/b10

    If you do this:
    =IF(B10=0,0,B11/B10)

    It will return zero instead of dividing by zero in the event there is no morningstar value.

    This also helps for cell M33 on Statements tab:
    =IF(ISERR((RCHGetElementNumber(Ticker,981)/1000)),L33,RCHGetElementNumber(Ticker,981)/1000)

    I found that doing this eliminates 99% of the err or val problems.

    Cheers and thanks

  • http://www.oldschoolvalue.com Jae Jun

    @ Texas,

    Thanks I was looking for a way to get rid of the err and val errors. How is the speed though? Since the condition has to be applied to so many cells do you see any slowdown in the calculations?

  • Texas

    @ Jae Jun

    I’m not sure about the change in calc times because I fixed it right when I saw it. It will probably slow the sheet down a little but I don’t mind the wait. My computer spits out a completed stock in 10-20 seconds and I’m not in a super hurry.

    It seems the biggest bottle neck in the sheet really is the data-pull which is out of your control.

    Could I give you some stocks to look at?

    P.S. Your name sounds Korean

  • http://www.oldschoolvalue.com Jae Jun

    @ Texas,

    Will definitely try to put in the conditional statements. Must admit it will vastly improve the aesthetics.

    If you have any stock requests, just write them down in the Q&A section and I’ll either answer it there, send you an email or write a post on it with a list of other stocks.

    P.S. The name is Korean :)

  • http://www.oldschoolvalue.com Jae Jun

    @ Susan
    Thanks Susan but I may also be very wrong ;)

  • Aron

    Hi Jae,

    I’m new to your site, but I’m very impressed and enjoying a lot of your content. I like your analysis of MHH, and as Susan says, it is convincing, but one thing jumped out at me – Wachovia Investments being their third largest client.

    Considering they were bought out, and are being consolidated into Wells Fargo (who might have their own staffing suppliers), isn’t this a major risk (10%+ of revenue)? I haven’t listened to the conference calls yet, but do they have any mitigation plans?

    thanks,

    Aron

  • http://www.oldschoolvalue.com Jae Jun

    Hi Aron,

    Good question. I asked myself that before I opened my position in MHH.

    In the latest quarterly report they don’t specify who their clients are but they have been able to gain more revenues by another customer in the first 6 months making it 4 clients that make up over 10% of revenues compared to 2 last year.

    My speculation is also that since WFC bought out Wachovia a while back and have already infused both companies, the cost cutting would have already happened. Looking at how the revenue makeup has increased from the lows, it does seem like the worst may be behind them.

    Just my own deductions.

  • dacian

    JJ

    You might want to have a look at RCMT; it’s a small cap similar somehow to MHH (no brokarage) and let me know what you think. I’m currently long RCMT and I have a target of 4$.

    thx

  • http://www.oldschoolvalue.com Jae Jun

    @ dacian
    Had a quick look at RCMT and it looks like a gold mine dependent on a few factors.
    I can’t quite get a value range but it looks like it should be between $5-7.

    Only concerns so far is that management seems to ruin the value of the company every 4-5 years when they start making acquisitions by paying way too much. In 2008 they wrote off a huge sum goodwill which means they threw money away with bad decisions.

    This looks like a real good value stock at current prices. Will look into it more and may take a position if I can understand the business and whether I believe the ongoing business is sustainable.

  • dacian

    JJ

    Pls. let me know what your conclusion is once you figure out more on RCMT. I personally don’t look at management, I just read rapidly what the business is but I’m buying based on balance sheet (I don’t know how to evaluate management)

  • Aron

    Thanks for the response Jae,

    I just listened to the latest call that is up on the website. The one other thing that I learned, and make me a bit nervous is that both their ceo search, which I know they have since completed, and one of their key priorities is to make acquisistions. Since this is often a place that management stumbles and destroys value (either by paying too much, or not being able to integrate, or just by losing sight of day to day operations while focusing on the merger), how do you reasure yourself that they know what they are doing? One counterpoint is that management mentioned not issuing stock because of their currently low valuation, but still. . .?

    thanks again,

    aron

  • http://www.oldschoolvalue.com Jae Jun

    @ dacian,

    I’m not great at evaluating management as well and it’s the quality of the assets and earnings of a company that determines it price rather than who is at the helm.
    I’ll try to look at RCMT deeper though but can’t guarantee whether I will be able to understand or analyse it.

    —————-
    Update
    RCMT is a pure Graham net net. Liquidation value of $2.31.
    They had a good 2nd quarter. 1st quarter results is inflated by $9.8m income from a lawsuit win.
    So far $2m in FCF for the year excluding the $9.8m

    Don’t think the company is worth more than $5. Probably around $4 but not sure how soon that value would be realised due to bad management.

    Seems like Barel Karsan also sees the same thing I did.
    http://www.barelkarsan.com/2009/08/when-goodwill-turns-evil.html

  • http://www.oldschoolvalue.com Jae Jun

    @ Aron,

    With a company like MHH, I really don’t expect growth. The industry is highly competitive and I doubt MHH has a sustainable competitive advantage.
    This is why I used a 0% growth rate. From what I see, the company should be in the $5-7 range with 0 growth.

    But as you mentioned, MHH is trying to grow by acquiring companies. The only way I can be reassured is to look at how previous acquisitions have performed.
    e.g. KTII is a company that has grown considerably through shrewd acquisitions where the CEO stuck to his guns and refused to overpay.

    MHH as a standalone has a short history but I would have to go to the pre spin off parent company (igate) and look at how they handled acquisitions since the chairman of Mastech also helped found igate and the execution would be the same.

    You could be onto something here. If I find out anything about bad mergers etc, I would either have to lower the valuation or sell if I am uncertain.

    Just looked at IGTE financial statements and although they have goodwill on their books impairments have been either 0 or negligible. Will probably look into it further but mergers won’t destroy company value immediately. If a bad one is announced, I’ll have plenty of time to get out.

  • Texas

    Jae

    There is no form on the Q&A page to submit analytics requests.

    MTXX
    QDHC
    ONAV

    Any thoughts?

  • http://www.oldschoolvalue.com Jae Jun

    @ Texas

    MTXX: don’t understand pharma. Pass
    QDHC: Can’t get a feel for the company. The numbers are all over the place for me. Pass
    ONAV: not an expert on shipping but their cash flow looks terrific. Looks VERY cheap. I think it would be worth around $12.

  • Siddharth

    hi jae,
    Excellent blog, i am glad i found it.i have a question about your methodology in determining Liquidation price. Why don’t you include Long-term investments that can be easily liquidated & some PP&E in our calculation??I understand that you are trying to err on the side of conservatism but still,won’t u miss out on certain Asset plays this way??

    Rgds,
    Siddharth

  • http://www.oldschoolvalue.com Jae Jun

    Hi Siddharth,

    I like to keep things simple. By simply sticking to the raw asset value I get a value that I am absolutely sure will be valued. This will also be the underlying bottom value of the stock for me – a look at the downside protection.
    Then for future valuations, I could adjust values here and there, but unless I’m an expert in the field I’m likely to get it wrong so it’s much better for me to err on the conservative side than optimistic side.

    I’ve missed out on plenty of opportunities but at the same time, I’ve been able to take big advantages of the ones I have found.
    As Buffett says, you only need 1-2 best ideas in a year.

    Thankfully, I’ve found quite a handful this year.
    In the upcoming premium spreadsheet release, I’ll be including EPV which includes adjustable input to the balance sheet.