Mastech: Forgotten Spin-off?

I recently dusted off my spinoff database to see if I can find anything interesting. One name which caught my eye was Mastech Holdings (MHH).

The stock was spun off from iGate Corp (IGTE) back in September of 2008. It began trading at around $10 and then a few weeks later, fell off a cliff to ~ $1 for no apparent reason. Since then has crawled its way back to $4.45.

At its current price, it is trading at an EV/EBTIDA of 3x whereas comparable companies are trading in a range of 9x-18x (average multiple 13x).

Regardless, as long as it isn't a buggy whip business, melting ice cube or a Toronto-listed company, any business trading at 3x EV/EBITDA on depressed earnings warrants inspection.

Mastech is an IT staffing firm. It has a market cap of $16 mm, has $7 mm in cash and zero debt. Last year, it generated $0.69 per share in free cash flow. Here is some historical financial data:

• Year: EPS/FCF per share
• 2005:$1.60/NA
• 2006:$1.92/$2.31
• 2007:$1.51/$1.51
• 2008:$0.71/$1.09
• 2009:$0.38/$0.69

The background on the business is that back during the 1990s tech bubble, there was a huge shortage of qualified IT specialists in the US (yes, it's true...it did happen). Mastech's parent company, iGate, is a provider of outsourced IT services to corporate America. The company developed a small in-house staffing business (call it a by-product) and spun it off to shareholders as a publicly traded company, Mastech Holdings.

You might have guessed it yourself, but let me just say that unemployment at 10% is not a good environment for revenue generation for Mastech and its ilk.

However, if you believe that the employment picture will get better, then you might find this an interesting way to play the cycle because it is relatively inexpensive, is still generating free cash flow and has no debt.

Some additional facts about Mastech which I found appealing:

1. Founders/managers of iGate continue to own 56% of MHH shares so they have a vested interest in MHH's success.
2. The spinoff was unsuitable for iGate's stockholders and most of them likely sold it without analyzing it.
3. This is not just true for MHH, most companies share this aspect - - the business has been restructured to deal with the severe downturn we are experiencing and when the cycle picks up, will probably generate excellent earnings.
4. If the upturn takes longer than expected, Mastech has a strong balance sheet and should be able to weather it. The risk of permanent capital loss for equity is small.

The risks:

1. Ownership concentration makes it vulnerable to a "take-under".
2. Staggered Board and poison pill in place.
3. Client concentration - 60% revenues are from top-10 clients.

The company will announce earning on April 28th and I have no idea what the numbers might look like. As far as I know, the stock has no official sell-side coverage.

Disclosure: Author holds a long position in MHH