Intrinsic value of Mastech Digital - MHH

Previous Close

$9.75

  Intrinsic Value

$6.10

stock screener

  Rating & Target

sell

-37%

Previous close

$9.75

 
Intrinsic value

$6.10

 
Up/down potential

-37%

 
Rating

sell

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of MHH stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  7.32
  2.90
  3.11
  3.30
  3.47
  3.62
  3.76
  3.88
  4.00
  4.10
  4.19
  4.27
  4.34
  4.41
  4.47
  4.52
  4.57
  4.61
  4.65
  4.68
  4.72
  4.74
  4.77
  4.79
  4.81
  4.83
  4.85
  4.86
  4.88
  4.89
  4.90
Revenue, $m
  132
  136
  140
  145
  150
  155
  161
  167
  174
  181
  189
  197
  205
  214
  224
  234
  245
  256
  268
  280
  293
  307
  322
  338
  354
  371
  389
  408
  428
  449
  471
Variable operating expenses, $m
 
  132
  136
  140
  145
  150
  156
  162
  168
  175
  183
  190
  198
  206
  216
  225
  236
  247
  258
  270
  283
  296
  310
  325
  341
  357
  375
  393
  412
  432
  454
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  128
  132
  136
  140
  145
  150
  156
  162
  168
  175
  183
  190
  198
  206
  216
  225
  236
  247
  258
  270
  283
  296
  310
  325
  341
  357
  375
  393
  412
  432
  454
Operating income, $m
  5
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  15
  15
  16
  17
EBITDA, $m
  6
  5
  6
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  15
  16
  16
  17
  18
  19
Interest expense (income), $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
Earnings before tax, $m
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  10
  11
  11
  12
  13
  13
  14
  14
  15
Tax expense, $m
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
Net income, $m
  3
  3
  3
  3
  3
  3
  3
  3
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  10
  11

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  39
  39
  40
  42
  43
  45
  46
  48
  50
  52
  54
  57
  59
  62
  64
  67
  70
  74
  77
  81
  84
  88
  93
  97
  102
  107
  112
  117
  123
  129
  135
Adjusted assets (=assets-cash), $m
  38
  39
  40
  42
  43
  45
  46
  48
  50
  52
  54
  57
  59
  62
  64
  67
  70
  74
  77
  81
  84
  88
  93
  97
  102
  107
  112
  117
  123
  129
  135
Revenue / Adjusted assets
  3.474
  3.487
  3.500
  3.452
  3.488
  3.444
  3.500
  3.479
  3.480
  3.481
  3.500
  3.456
  3.475
  3.452
  3.500
  3.493
  3.500
  3.459
  3.481
  3.457
  3.488
  3.489
  3.462
  3.485
  3.471
  3.467
  3.473
  3.487
  3.480
  3.481
  3.489
Average production assets, $m
  8
  8
  9
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  29
Working capital, $m
  11
  12
  13
  13
  14
  14
  15
  15
  16
  16
  17
  18
  19
  19
  20
  21
  22
  23
  24
  26
  27
  28
  29
  31
  32
  34
  35
  37
  39
  41
  43
Total debt, $m
  10
  10
  10
  11
  12
  12
  13
  14
  15
  16
  17
  18
  20
  21
  22
  24
  25
  27
  29
  30
  32
  34
  36
  39
  41
  43
  46
  49
  52
  55
  58
Total liabilities, $m
  20
  20
  20
  21
  22
  22
  23
  24
  25
  26
  27
  28
  30
  31
  32
  34
  35
  37
  39
  40
  42
  44
  46
  49
  51
  53
  56
  59
  62
  65
  68
Total equity, $m
  19
  20
  20
  21
  22
  22
  23
  24
  25
  26
  27
  28
  30
  31
  32
  34
  35
  37
  39
  40
  42
  44
  46
  49
  51
  53
  56
  59
  62
  65
  68
Total liabilities and equity, $m
  39
  40
  40
  42
  44
  44
  46
  48
  50
  52
  54
  56
  60
  62
  64
  68
  70
  74
  78
  80
  84
  88
  92
  98
  102
  106
  112
  118
  124
  130
  136
Debt-to-equity ratio
  0.526
  0.490
  0.500
  0.520
  0.540
  0.550
  0.570
  0.580
  0.600
  0.620
  0.630
  0.650
  0.660
  0.680
  0.690
  0.700
  0.720
  0.730
  0.740
  0.750
  0.760
  0.770
  0.780
  0.790
  0.800
  0.810
  0.820
  0.830
  0.840
  0.850
  0.850
Adjusted equity ratio
  0.474
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500
  0.500

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  3
  3
  3
  3
  3
  3
  3
  3
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  10
  11
Depreciation, amort., depletion, $m
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
Funds from operations, $m
  0
  4
  4
  4
  4
  5
  5
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
Change in working capital, $m
  -2
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
Cash from operations, $m
  2
  4
  4
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  7
  8
  8
  9
  9
  9
  10
  10
  11
Maintenance CAPEX, $m
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
New CAPEX, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
Cash from investing activities, $m
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
Free cash flow, $m
  2
  3
  3
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
Issuance/(repayment) of debt, $m
  -3
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -2
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
Total cash flow (excl. dividends), $m
  0
  3
  4
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
Retained Cash Flow (-), $m
  -3
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  3
  3
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
Discount rate, %
 
  5.20
  5.46
  5.73
  6.02
  6.32
  6.64
  6.97
  7.32
  7.68
  8.07
  8.47
  8.89
  9.34
  9.81
  10.30
  10.81
  11.35
  11.92
  12.51
  13.14
  13.80
  14.49
  15.21
  15.97
  16.77
  17.61
  18.49
  19.41
  20.38
  21.40
PV of cash for distribution, $m
 
  3
  3
  3
  2
  2
  2
  2
  2
  2
  2
  1
  1
  1
  1
  1
  1
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
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Mastech Digital, Inc., formerly Mastech Holdings, Inc., is an information technology (IT) staffing and digital transformation services company. The Company offers Social, Mobility, Analytics and Cloud (SMAC), Automation and Internet of Things (IoT) technologies. It is engaged in providing IT associates in digital and mainstream technologies, digital transformation services around Salesforce.com and SAP HANA, as well as digital learning services. SAP HANA is an in-memory platform both for Systems, Applications and Products (SAP) and non-SAP customers. Its stack of digital transformation services focuses on providing customer relationship management (CRM) on the cloud through Salesforce, driving IT efficiencies through SAP HANA and using digital methods. Its digital learning services puts together a custom training program for various organizational needs. The Company serves a range of industries, including insurance, banking, healthcare, aviation, manufacturing and telecommunication.

FINANCIAL RATIOS  of  Mastech Digital (MHH)

Valuation Ratios
P/E Ratio 14.6
Price to Sales 0.3
Price to Book 2.3
Price to Tangible Book
Price to Cash Flow 21.9
Price to Free Cash Flow 21.9
Growth Rates
Sales Growth Rate 7.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate NaN%
Cap. Spend. - 3 Yr. Gr. Rate NaN%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity 42.1%
Total Debt to Equity 52.6%
Interest Coverage 0
Management Effectiveness
Return On Assets 7.8%
Ret/ On Assets - 3 Yr. Avg. 11.5%
Return On Total Capital 10.3%
Ret/ On T. Cap. - 3 Yr. Avg. 17.3%
Return On Equity 17.1%
Return On Equity - 3 Yr. Avg. 21.7%
Asset Turnover 3.4
Profitability Ratios
Gross Margin 18.9%
Gross Margin - 3 Yr. Avg. 18.7%
EBITDA Margin 3.8%
EBITDA Margin - 3 Yr. Avg. 4.4%
Operating Margin 3%
Oper. Margin - 3 Yr. Avg. 3.8%
Pre-Tax Margin 3%
Pre-Tax Margin - 3 Yr. Avg. 3.8%
Net Profit Margin 2.3%
Net Profit Margin - 3 Yr. Avg. 2.4%
Effective Tax Rate 25%
Eff/ Tax Rate - 3 Yr. Avg. 33.3%
Payout Ratio 0%

MHH stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MHH stock intrinsic value calculation we used $132 million for the last fiscal year's total revenue generated by Mastech Digital. The default revenue input number comes from 2016 income statement of Mastech Digital. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our MHH stock valuation model: a) initial revenue growth rate of 2.9% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 5.2%, whose default value for MHH is calculated based on our internal credit rating of Mastech Digital, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Mastech Digital.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of MHH stock the variable cost ratio is equal to 97%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for MHH stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Mastech Digital.

Corporate tax rate of 27% is the nominal tax rate for Mastech Digital. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the MHH stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for MHH are equal to 6.1%.

Life of production assets of 16 years is the average useful life of capital assets used in Mastech Digital operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for MHH is equal to 9.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $19 million for Mastech Digital - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 5.448 million for Mastech Digital is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Mastech Digital at the current share price and the inputted number of shares is $0.1 billion.

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COMPANY NEWS

▶ How Financially Strong Is Mastech Digital Inc (MHH)?   [Oct-24-17 07:28AM  Simply Wall St.]
▶ At $10.56, Is Mastech Digital Inc (MHH) A Buy?   [Sep-20-17 07:09PM  Simply Wall St.]
▶ Mastech Digital buying InfoTrellis division for $55M   [Jul-14-17 10:35AM  American City Business Journals]
▶ Mastech Digital Completes Acquisition of InfoTrellis   [Jul-13-17 03:51PM  PR Newswire]
▶ Mastech Digital to Acquire InfoTrellis   [Jul-07-17 08:00AM  PR Newswire]
▶ 10-Q for Mastech Holdings, Inc.   [Aug-17  08:13PM  at Company Spotlight]
Financial statements of MHH
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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