In 2006 Hurco opened a new component manufacturing facility in Ningbo, China. Ningbo is located in the Ningbo Economic and Technical Development Zone [NETD], in order to help develop Ningbo, the Chinese government has decreased taxes and expedited customs clearance for the NETD area. However, the strategic placement of the Ningbo manufacturing facility goes beyond simple cost reduction for Hurco. During the next year Hurco plans to expand the Ningbo facility to include sub-assembly and final assembly operations. After completing the facility expansion, Hurco plans to “build machines that are specifically designed for the complexities of the Chinese market”.
Hurco has a P/E of 13 and a forward P/E of about 9.5. These P/E ratios are low considering that Hurco continues to exhibit strong growth in Europe and it has yet to experience the full impact of the cost reductions due to the opening of the Ningbo facility. Hurco is expected to grow by about 22% in 2007, but I believe that these estimates are conservative. Hurco has consistently executed their growth strategy by growing revenues and profits for the last three years.
Despite this growth, shares of Hurco declined slightly in 2006 largely due to a decrease in the growth rates for both revenues and profits in the April and July quarters of 2006. In the most recent quarter revenue growth was back on track growing about 25% compared to the same quarter in 2005, but profits dropped. However, profits only dropped because in 2005 Hurco did not incur income taxes while in 2006 Hurco was fully taxed. For the full year of 2006 Hurco had an operating profit that was 15.2% of sales compared to an operating profit of 13.1% of sales for 2005.
I believe that profit growth will resume in 2007. Growth rates for 2007 will be comparable to the fully taxed growth rates of 2006 unlike the 2006/2005 comparisons. Additionally, in 2007 Hurco will start to fully realize the increased efficiencies of the Ningbo plant and the company should begin to capitalize on the rapid growth of the Chinese manufacturing industry. With a current P/E of 13, Hurco is already value priced compared to competitors and Hurco has a higher anticipated growth rate than the industry average. European demand for Hurco’s products remains strong and should continue to grow in 2007, but the real opportunity for Hurco’s long term growth lies in the Asian markets.
With a market capitalization of about $200 million, I believe that with a return to profit growth, Hurco’s shares have a lot of room to run. Consistent growth in European markets combined with a growing need for sophisticated computerized machine tools in rapidly growing Asian markets, should fuel growth at Hurco for many years to come.
HURC 1-yr chart
Disclosure: Author is long HURC.