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

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, 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 learned 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 the former 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

Source: Something Good Is Going On at Mastech