Was reading my usual blogs and found a writeup for a stock that caught my eye for MHH, a pretty thinly-traded spinoff that does IT staffing.

Business overview:
http://www.oldschoolvalue.com/stock-...gs-mhh-part-1/

Actual financial statement analysis:
http://www.oldschoolvalue.com/stock-...-holdings-mhh/

MHH is currently trading at $3.15 and has got a market cap of $11.3m, current assets of $15.8m and current liabilities of $6.3m, no long-term debt, no off-balance-sheet arrangements and minimal operating leases (something like $200k / year for office space and that's it.) They've consistently made money and been cash-flow-positive, last year's net income was $3.5m, giving them a p/e of around 3.2 or so and price/free cash flow is around 2, how sexy is that? So, yeah, last year the economy was horrible and they still did quite well. This seems cheap even if they never make any more money than they do now, especially given their balance sheet and the fact that they're actually generating cash.

So what's the deal? This seems super-cheap. I know it's very thinly-traded and I know often spinoffs get kinda punished their first year because the shares of spinoffs are distributed to people and institutions that don't want to or can't own them.

I'm still pretty new to all this, so it's really possible I'm missing something or misinterpreting something. Any thoughts or ideas?

Most recent 10-K: http://www.sec.gov/Archives/edgar/da...58360/d10k.htm

Most recent 10-Q: http://www.sec.gov/Archives/edgar/da...09449/d10q.htm

Spinoff doc: http://www.sec.gov/Archives/edgar/da...434/dex991.htm

From their 10-k:

From my understanding they are like the "headhunters" of IT also known as middlemen. Companies need to fill positions, they contract out the position to these headhunters. Someone is looking for a job, they go to these headhunters. The headhunters do the interviewing and filter prospects through to the company. However, they also do staffing of their own. Having using these headhunters before, they are very cyclical with the unemployment rate. If companies aren't hiring, these headhunters aren't making money.

Low barriers to entry mean there isn't much differentiation in the product or service. What is going to set them apart from another company doing the same thing?

So the companies who are "outsourcing" their positions may elect to just end up doing it on their own, which in turn puts these headhunters out of business.

This basically explains what I said above about the unemployment rate.

If they lose one of their top ten clients or a couple, their profitability will be greatly reduced.
Yeah, think about if IBM stops contracting out their hiring. 15% of their revenues are gone. And Wachovia who was bought by Wells Fargo probably isn't going to be doing too much hiring in 2009.

Taking a quick look at their financials, most of their revenue is being eaten up by the cost of their revenue. Cash flow is decreasing, which is expected with their business model.

Overall, I think that should be enough to explain why I personally don't see this as a good investment. There is a reason why the stock is only trading at $3. I haven't done a complete analysis of their 10-k, just skimmed it quickly.

So 38% of their revenue comes from three sources - but yet one of those sources is a staffing service itself...huh? So the staffing service is staffing its offices with consultants?

At first glance this appears to be the kind of stock Buffett might have picked up in his partnership days - given you believe the valuation put forth by the oldschoolvalue site.

Risk is considerably higher then something like CTSH. Growth, I would say, its majorly dependent upon how management is reinvesting its capital to build its market share. Being so small and having so much cash on hand suggets to me they don't know what to do with it to grow their business, in my opinion. Having no debt is great...but that seems standard with a business that isn't growing and is a service industry company that doesn't produce anything.

ItalianFX, come on man, I think you can do better than that... saying "dude there's a lot of risks and bad stuff could happen, there's a reason it's cheap but I didn't actually look into it or think about it"... that's weaaaaak.

I'm asking if you can figure out a reason why it's so cheap, what am I missing? Quoting the "business risks" portion of their 10-K ain't it. I'm also pretty sure you are totally off on what they actually do. They're consultants, not headhunters. They derived < 1% of their revenue from "permanent placements/fees" last year.

Can you find anything wrong with it? I can't, but I might be wrong.

Agreed, but CTSH is trading at 8x the P/E.

Yeah, I actually don't think this company is an incredible powerhouse or anything like that. I just think it's cheap, even if they don't grow. I don't think it's a terrible company, they generated a lot of cash last year even though it was a bad year.

I'm still of the mind that even if this company doesn't grow at all it's cheap. I'm looking at this like someone's trying to sell me a company that throws off $50k in cash each year, and that company has $43k in the bank, $95k in receivables and $50k in debts. Price: $120k. Deal or no deal?

That analogy falls a little short if management sucks, but that Sunil guy cofounded iGate, so, I think that's probably not bad.

I can only guess why it's cheap. I guess I thought you'd understand that an unemployment rate of 9.4% isn't good for staffing agencies and "low barriers to entry" would be a signal to you that they aren't much different than any other agency that does the same thing.

If I'm selling wheat for $5 and you're selling wheat for $5, what makes my wheat any better than yours? If I lower my price to take away your customers, I'm only hurting myself.

And I'm not going to spend an hour analyzing a company that you can't seem to make up your own mind about, when an initial 10min look gave me the impression that I wouldn't put my own money into this company. That was my analysis, take it or leave it. If you say it's cheap, then it is. If I think it isn't a good investment based on my own analysis, then it's not.

"This is a bad time to be in staffing, unemployment is high! You can't have a moat in this business! Therefore, I would never buy a staffing company at any price no matter how cheap. Also, when I made up my mind about this company at this price, I thought they were in a totally different business than the one they're actually in. Take it or leave it, that's my analysis."

Great analysis.

What kind of business do they actually do? If I'm wrong and misunderstood it based on what I read, then I take back what I said about it, but I still don't believe that it changes the variables.

Look, I started this thread hoping competent, smart people that are experienced investors would take a look at this and give their opinion. You aren't that kind of person and you didn't do any kind of analysis at all. We are all dumber for having heard you speak, and may God have mercy on your soul.

I already told you what they actually do, they aren't headhunters, theyr'e consultants. Jesus.

So you don't think this is a buy at $3.30. But, presumably, if the company offered to sell itself to you for $0.01 / share, you'd take them up on that. The whole point of a real analysis is to look at a company, figure out it's approximate worth, then decide what you'd actually pay for it. What would you pay for it? If you need a referesher on the #'s look a few posts above. I'm curious.

Whats up with the severe drop in PPS from its split? It spun off at $9 and almost immediately dropped to under $2. Either some people were royally screwed or a VC dumped after it IPO'd or some insiders were greedy bastards that probably shouldn't be trusted long term to put shareholder value as a priority.

I'm not going to argue. I thought I was helping you, but apparently since you don't agree with me, I guess I'm less competent than you are.

I never said it wasn't selling at a great price. I was just saying with economic conditions and the company being in an industry with low barriers to entry, I wouldn't buy it. I do think it's very cheap with a PE of 3.92. One thing I like to do is figure out the Income before taxes, figure out an EPS from that, and then find the Earnings-to-Price. In just a roundabout way, based on Yahoo's EPS of .84 and adding 35% back onto it, the E/P is roughly 25% which is a pretty good return. I don't know where Yahoo is getting .84 from so the numbers could be off.

That's a good question, I'm not really sure.

I do recall from the book You can be a stock market genius by Joel Greenblatt he talks about spinoffs often getting beat down in the first year of being on the market because the shares get distributed to current shareholders who often don't want them and also to funds that have to dump them. iGate's a $300M company and they spun off a little piece worth $30m or so at the time and that's too small for a lot of institutions? I guess? Also, I think he cited a study where spinoffs significantly outperform the market during their second year of existence because their prices are artificially depressed at first given the above reasons.

That 1 chapter of a book I read 2 years ago is the extent of my spinoff knowledge, I may be wrong.

It's not that you don't agree with me, it's just that I thought your analysis wasn't very good. You didn't even look at the price, you just quoted some stuff from the 10-K risks section, said "oh wow this industry sucks, don't buy this stock." With something like this, price is the whole point.

I do agree with you that this industry isn't very good, and this isn't a company I'm planning to hold for 30 years. The idea is that this company is a very good deal at this price.

Spin-offs don't IPO, they just get distributed to new shareholders and start trading, no money changes hands. In this deal iGate holders received one share of MHH for every 15 shares of iGate that they held. When the spin-off starts trading it can trade a few shares at wild prices before settling into the level where demand meets supply. There aren't any VCs or greedy insiders involved. Spin-offs can tend to get undervalued because when shareholders of the parent company receive the spin-off they tend to be sellers without bothering to learn what they are selling. You can read about this in "You Can Be a Stock Market Genius". The effect can be magnified when the spin-off ratio is high(check) and the size of the company is small compared to the parent(check). And MHH started trading at a time when the average micro-cap stock probably fell 50% in a few months. This seems like a pretty good idea on the face of it, very low multiple to income and cash flow and only a small premium to net net working capital. Italian_fx raised concerns but didn't think about the valuation at all. You're not going to find a great house in a great neighborhood for real cheap, there are going to be problems with any undervalued house you can find. Same goes with stocks.

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.

Why?

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)

Cheers,
http://www.oldschoolvalue.com

I wanted to emphasize how important I view the asset value in a stock like this. There are lots of situations where you have a micro-cap trading at a great multiple to earnings and they are growing and etc etc. But they don't have any asset value backing you up. So in most cases the earnings growth slows or they start losing money and all of the sudden you're sitting on a 80% loss. DSUP is a very extreme example of this(extreme because they had negative earnings and negative book value). You really need to be backed up by assets and a solid balance sheet when you are buying a micro-cap for its earnings power because the earnings are usually going to be much more risky than you think.

yeah, not to mentioned they were so leveraged that if things didn't go really really well bk was inevitable (if i recall correctly)

Mastech sponsors a lot of visas so they will probably do pretty well imo. That they sub to Tek & IBM is a good thing, since both of these companies sub most of this stuff out and are relatively stable. It is also very hard to get on the core vendor lists for these companies. Biggest issue at the moment in the industry is a lot of small guys domino-ing each other with collection issues and stealing each others talent (2nd part of that is industry standard no matter the conditions AFAIK). Having the majority of their cash coming from companies I would consider stable is a strong plus. If a major customer was BearingPoint on the other hand...

I am not knowledgeable with P&L analysis, but I would suggest looking at cash vs annual salary expense or something to that effect, as this company is its people and nothing else.

# 34 in h1b visa sponsorship in 2007 FWIW

My thoughts, GL any which way.

P.S. A visa shop is a very different animal than a headhunting firm or even a software development company. Think orange juice vs the orange.

Is this a level?

Thanks for clearing that up. My choice of words was poor but I obviously didn't know better to use.

Heh, my placing is off and appear to be pre spin off, they were #42 FWIW.

Curiosity - how did you come by our little BFI world?

Thanks for your input as well. If you can bear these forums in general your input and opinion will probably be appreciated by many. Of course if you feel it devalues your own site, then thats understood.

Nice analysis.

What are your thoughts on the importance of a catalyst in a name like this? It's dirt cheap (assuming earnings power is not significantly reduced going forward), but what can management do to publicize any of this value?

If there is no catalyst, then must investors have a very long-term time horizon (3-years+) to generate above-average returns? Is there a way to hedge out any of the signficant systematic risk that comes with this (e.g., shorting a basket competitors)?

I was notified of a link to my site and followed it here.

Catalysts aren't always needed for these cheap stocks but here are some. They may sound a little general but a catalyst is a catalyst nonetheless

Economy improves
Unemployment rate goes down
MHH major customers announce hirings

Just basic employment related ideas for you to ponder.

Yeah and if the market still didn't recognize this cheapness they could always do a buyback or issue a dividend.