On 12/03/2012, we coded Mastech Holdings (MHH) as a GeoBargain on the radar @ $5.15 (Adjusted for $2.00 special dividend).
On 12/19/2012 we coded MHH as a GeoBargain @ $5.50 (Adjusted for $2.00 special dividend).
On 12/24/2012 we sent our members an email with the following verbiage when the stock was trading in the low $5s:
We are adding to our GeoBargain MHH position as shares have fallen more than the special dividend payout. We feel that the shares should gravitate back to the mid $6.00 area. We will add to our position if it continues to fall.
MHH is a company that should appeal to growth and value investors as well as those who like to buy stocks that are benefiting from restructuring moves. Under Kevin Horner, CEO of MHH since 2011, the company is entering its third year of several initiatives intended to drive revenue and higher margins. The company has put together eight straight quarters of meaningful non-GAAP EPS growth, a trend we expect to continue throughout 2013. Finally, MHH's management team has shareholders' interests in mind as evidenced by the adoption of stock repurchase programs and the recent payment of a $2 special dividend. We believe the stock has yet to fully reflect these positive catalysts.
Company Description Mastech "Provides information technology and specialized healthcare staffing services primarily in the United States. The company offers a range of IT staffing services in the areas of business intelligence, data warehousing, service-oriented architecture, web services, enterprise resource planning, package implementation life cycle, customer resource management, and e-business solutions."
Data Ended 1/28/2013 (Fiscal Year End December)
- Price = $6.45
- Fully-Taxed Trailing non-GAAP EPS = $0.66
- P/E based on Fully-Taxed Trailing EPS = 9.8
Qualitative Reasons for Optimism
1. New Focus Revamps Growth Path. Industry trends forced the company to change its business model in the early 2000s. An excerpt from the form 10K best explains the situation:
Established in 1986, our business model focused on importing global IT talent to the U.S. to meet the growing demand for IT professionals. In the early 2000's, the demand for IT professionals cooled and the supply of IT resources quickly exceeded a declining demand curve. No longer was there a need to recruit abroad for technology talent, as supply was abundant in the U.S. Accordingly, the Company retooled its recruiting model to focus on the recruitment of U.S.-based IT talent. Given the Company's reputation with, and knowledge of, H1-B visas, part of our recruiting efforts focused on attracting H1-B visa holders currently in the U.S. This approach gave the Company access to a larger and differentiated recruiting pool compared to many of its competitors.
Since its transformation the company has expanded its restructuring efforts, aided by Kevin Horner, who was appointed as CEO of Mastech in October of 2011.
Mr. Horner has more than 30 years of experience in the information technology industry and has held both domestic and international leadership positions throughout his distinguished career at Alcoa Inc. Prior to joining Mastech, Mr. Horner served as Alcoa's Chief Information Officer where he was responsible for creating an intricate information technology environment to support a $25 billion multi-national enterprise.
In a nutshell the company has reduced the quantity of its staff while increasing its quality. The company also sought the help of consultants and hired a new Director of Recruitment to:
- drive sales
- improve the quality of its employees
- implement a better system to monitor the performance of its recruiters as well as its recruits
In order to further drive sales the company:
- put in place better incentive programs for its sales team
- placed a larger part of its focus on offering recruits to other staffing firms that are lacking in areas of customer satisfaction.
These moves should result in a happier end customer, more customers and an increase in the wallet share per customer. Also, the company has yet to aggressively monetize its entry into the healthcare staffing sector (currently less than 10% of sales). Finally, MHH does not derive a lot of revenue from permanent staffing arrangements, which could change as the economy improves. This business has higher margins than its temporary staffing business.
2. Favorable Industry Trends. According to the American Staffing Association:
In the three years since the end of the Great Recession, the U.S. staffing and recruiting industry has created more jobs than any other single industry in America.
The association also points out that the U.S. staffing industry growth has been more robust in the current economic recovery than it was in the three years following the previous two recessions, which ended in 2001 and 1991.
Here are some comments from some other sources around the Web regarding the staffing industry:
According to the report, while many companies continue to reduce their headcount, agencies specializing in filling part-time positions are excelling, even in a down economy.
This sector - the largest within employment services - should continue to generate the most new jobs in this industry." "A recent survey from CareerBuilder revealed that many companies that reduced staff after the recession hit are turning to staffing companies and temporary workers for help. According to survey results, 36% of companies plan to hire contract or temporary workers during 2012 - up from 34% percent in 2011, 30% in 2010, and 28% in 2009.
The U.S. staffing industry is anticipated to grow faster and add more new jobs over the next decade than just about any other industry, even taking into account the after effects of recession. The temporary staffing segment is expected to grow with a higher growth rate over a period of next five years (2010-2015E) driven by aging baby boomers, project based job opportunities, business outsourcing trend and companies overcoming from recessionary losses.
Some temporary help segments are expected to surpass their historical peaks in 2013: industrial (112 percent of historical peak), information technology (116 percent), locum tenens/physician staffing (128 percent), engineering (111 percent), clinical/scientific (104 percent), and marketing/creative (106 percent). Demand for temporary talent for these occupational skill sets are at historic high levels. If the supply of workers willing to accept these temporary roles is not readily available, pay rates will rise and time-to-fill will lengthen as buyers compete for scarce resources.
At around $100 million in revenue, MHH still occupies a small piece of the $130 billion IT staffing market, leaving plenty of room for growth.
3. Maximization of Shareholder Value.
- On October 24, 2012 not only did the company extend a share repurchase program implemented on December 23, 2010 but it also increased the number of shares authorized to be purchased under this program by 250,000. MHH also has extended the duration of the program for an additional two years, through December 22, 2014. Through the first nine months of 2012, the company spent $2.5 million to repurchase 436,026 shares of common stock.
- Just one month from the share repurchase program announcement the company's Board of Directors declared a special one-time cash dividend of $2.00 per share of common stock, this dividend was paid on December 24, 2012.
We believe that MHH will continue to return capital to its shareholders as long as the stock trades at a depressed valuation compared with its growth.
4. Favorable Fundamental Trends.
- MHH has grown non-GAAP EPS for eight consecutive quarters and revenue has increased each quarter for the past 10 quarters.
- As can be seen by the chart below the company's EPS growth has been clearly outpacing its revenue growth. With pretax margins at 4%, we believe there is much room for improvement. We think MHH will continue to grow earnings at a faster clip than revenue since the company is still in the early stages of its programs intended to improve efficiencies.
We are assigning MHH a GeoPowerRanking (GPR of 4), meaning that we expect the company to grow EPS by at least 20% to 30 % for 4 consecutive quarters. (See more on GPR here)
It is no coincidence that the company's growth in sales and earnings accelerated after Mr. Horner joined the company. Despite these favorable trends, the stock is selling at a PE of 9.8, PEG ratio of 0.13 and a price-to-sales multiple of 0.21. MHH price-to-sales ratio is considerably less than Igate Corporation's (IGTE) similar multiple of 0.88. (IGTE spun-off MHH in October of 2008)
We believe MHH is appealing to both growth and value investors. In fact, this appeal may already be materializing as evidenced by the sharp 23% increase in MHH's price over the past 14 days. Much to our satisfaction and giving us more time to add to our long position in MHH, momentum investors may not have found the story since at face value the stock is selling at 25% off of its 52-week high of $8.5. However, astute investors know the stock is in striking distance of this level when adding back the $2 special dividend paid on December 24, 2012.
5. Growing Faster Than the Industry. The IT Staffing industry is slated to grow 6% in 2013. We think MHH can grow its top-line at a multiple of this rate. To drive this point home, investors only need to realize that under its new direction the company grew its 2011 revenue at a rate of 2.4 times the 2011 industry rate of 10%. And it appears that the 2012 revenue growth rate will be at least 15% or nearly 2 times the 8% industry average.
Management commentary confirms these trends:
We significantly expanded our IT consultant-base during the quarter; we continued to drive superior top-line revenue growth when compared to most of our industry peers.
If we assume that the company's growth can at least double the industry's growth average in 2013, revenue should come in around $115 million.
Criteria Check List MHH Meets 9 out of 10 of our most important requirements for growth and risk-based quantitative data.
Note: Data above is based off of third-quarter 2012 10Q. After today's fourth-quarter 2012 results, GPR is now 4.
GeoTeam overall subjective/confidence comfort level: Pertains to the ability of a company to achieve solid and consistent EPS growth over the next several quarters (from 1 to 10): 7
Potential Valuation Scenarios If the Company Can Achieve Its EPS Growth Goals
Following is the short-term potential value based on fully taxed adjusted trailing EPS.
P/E 20 $0.66 = $13.20
P/E 25 $0.66 = $16.50
Caveats That May Challenge Growth
- The IT staffing industry 2013 growth rate falling short of expectations
- Less than anticipated expansion of margins
- A reduction in the pool of potential quality IT recruits.
- Economic recovery stalling
Additional factors to consider in analysis
- Effective Internal Controls: Yes
- Needs to raise capital: No
Foot notes 1Valuation scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.
2Our analysis is based on Quantitative and Qualitative factors. Even if a company does not meet the majority of our quantitative requirements, strong qualitative factors can still influence our optimism for a given story. Furthermore, gaining alpha in a market entails finding companies before the masses do, which means that there is value added when one can identify stocks that may currently have weaker quantitative data, but will soon improve. The GeoTeam typically considers EPS Growth, Revenue Growth and PEG Ratio as the most important quantitative attributes that affect short-term valuation.
Disclosure: I am long MHH.