digital mastech (MHH) is an international supplier of Computer science [IT] recruitment and digital transformation services focused on solving the digital/online challenges of businesses of all shapes and sizes. Its IT staffing solutions encompass both digital and legacy technologies, while its digital transformation services include Salesforce.com, SAP HANA and digital learning services. The company is based in Pittsburgh, with offices in the United States and India.
In many ways, it’s an outsourcing and consulting service for businesses that need low-cost help with analyzing customers and online footprints, reviewing internal technology usage and offer scalable one-time support for all types of IT-related questions and issues. The company works with its customers to achieve higher technology efficiencies, minimize costs, and dramatically improve success rates through the application of data and analytics expertise in the areas of data management, of engineering and science.
Mastech is actually one of the lowest cost investment choices in the IT recruitment and consulting industries. On the below chart of estimated 1-year PERs, MHH sits near the bottom of the peer and competitor group.
When it comes to forward sales pricing, Mastech sits in the middle of the pack with its hybrid business model of doing both consultancy and remote staffing for other companies.
The calculation of company value to earnings before interest, taxes, depreciation, and amortization is well below the average S&P 500 ratio of about 17 times today. That’s 11.5x EV to the trailing EBITDA multiple well worth the property, if sales and earnings continue to grow in 2022-23.
And, revenue growth is on the higher end of the spectrum compared to peers, looking at analyst forecasts 2022-23. For those in the Growth at a reasonable price [GARP] crowd, MHH is definitely worthy of your research time.
The return on investment for the company is high, a big plus in my opinion, as limited upfront capital is required for many of their remote IT assignments. The total liabilities to assets ratio is a low and conservative number relative to the industry. And, I personally believe that improving overall margins will be a scenario in the future as the business achieves better economies of scale. I expect returns and margins on most metrics/comparisons to show a slight increase in 2023-24.
Strong Technical Chart Template
The main reason I’m attracted to Mastech is that its dynamic 3-month trading chart has been quite bullish. Volume buying and a clear trend of price outperformance against peers and the S&P 500 caught my attention. Its low valuation and stable growth profile are likely the positive developments creating buying interest.
On the 3-year chart below of Total Shareholder Returns, MHH was the biggest winner against the peer group/competitors of staffing firms and consultants.
Below is a 2 year chart of the MHH super strong uptrend. The near-triple of its quote between March and June 2020 has everything to do with its unique business of remote IT staffing during the pandemic shutdown at home for businesses. While the price is down around 40% from the 2020 high, the underlying trends in sales and corporate profitability continue to improve. My reading of the longer-term chart is that the company is seeing robust demand and growth, which could continue regardless of waves of COVID-19 (or lack thereof) in the future.
On a 6-month chart of the same momentum indicators, we can see a real reversal story appear in the Accumulation/distribution line, Negative volume index and On balance volume simultaneous readings. It is very difficult to find a similar uptrend on an individual stock chart over the last three months of generally falling prices on Wall Street. What I take away from the MHH technical trend is a real level of buying enthusiasm that I want to be part of. It seems that the medium-term imbalances between supply and demand for equities now favor ownership. I particularly like the ADL and OBV indicators which are soaring from mid-January. A lack of overhead sharing supply could be the reason.
Looking at the above fundamental ratio analysis of Mastech Digital’s valuation, and assuming current analyst expectations for sales and EPS are met in 2022-23, I arrive at MHH price targets of “fair value” of $25 by summer and potentially $30 in 12 months. Other assumptions are that CPI inflation will average 5% or less in calendar year 2022, and the Treasury debt yield curve will only rise from 1% to 2 % over the next 6 to 12 months.
Of course, I’m modeling that the geopolitical mess between Russia and Ukraine and/or an overly aggressive Federal Reserve tightening cycle is not pushing the US economy into recession this year. In addition to these macro risks, a stock market crash or a worsening bearish phase on Wall Street could keep the stock quote under pressure in the $15-18 range well into the summer.
I have a small Mastech position in my diversified and hedged long/short portfolio design. I may try to buy a larger stake in the coming weeks. Placing a 20% stop-loss sell order around $15.25 can also be a smart risk-control idea for investors who don’t use high cash levels or short-sell hedges today. in portfolio construction.
Thanks for reading. Please consider this article as a first step in your due diligence process. It is recommended to consult a registered and experienced investment adviser before carrying out any transaction.