Hurco (HURC) is a tiny industrial company with almost no coverage, but size and popularity are no barrier to solid performance. Once again Hurco surprised investors with better than expected financial results, and while the company's largest market is seeing tougher conditions, the value in this stock is still worth considering.
Another Solid Quarter
Hurco reported 29% revenue growth for its fiscal first quarter, with Europe leading the way at 41% growth. Sales in North America rose 14%, while sales to Asia-Pacific rose 19% (but are only about 12% of the total). On a unit basis, North America saw 4% growth, while European shipments grew 25%.
Hurco's profits benefited not only from the sale of higher-margin products, but also better overall capacity utilization and operating leverage. Gross margin moved up three points to 32% (more or less flat sequentially), while operating income more than doubled and rose nearly 50% on a sequential basis. Operating margin climbed above 13% for the quarter - still below the peak margin (roughly 16.5%) seen a few years ago.
Sluggish Orders Are A Reason For Concern
Although Hurco's overall order growth was significantly stronger than that reported by fellow small-cap toolmaker Hardinge (HDNG), the numbers are still going to inspire a little caution.
Orders grew 10% overall in the quarter, with orders up 15% in Europe and 6% in North America. On a unit basis, though, orders were down 4% in Europe and up just 3% in North America. To throw even more data into the mix, those numbers were up about 7% sequentially for North America, but down almost a quarter for Europe.
So, what should investors make of this? On one hand, Hurco has a good record of reporting revenue above and beyond the order rate. What's more, Hurco seems to be selling a lot more of the higher-value VMX systems. Further, industrial supply company MSC Industrial (MSM), which has a reasonable overlap with Hurco in terms of customers, is seeing solid domestic demand. Said differently, business is on track in the U.S. industrial market.
Europe is getting difficult, however. German machine tool orders were down 4% in the fourth quarter and down another 9% in January. Even if the company is gaining share, then, it is against an increasingly difficult backdrop. It helps that growth in markets like healthcare and aerospace (historically good markets for Hurco's equipment) are showing reasonable strength, but investors should prepare themselves for a mid-year slowdown in sales at Hurco with a potential rebound about six months later.
Asian machine tool companies like Mori Seiki and Okuma have also reported slower order growth recently. Although Asia is a much more significant market for Hardinge than Hurco, there's a certain amount of interconnectedness - if China stalls out, demand for specialty components (which are made in Europe with Hurco systems) is also going to stall.
How Bad Will Europe Get?
One thing that may help mitigate the overall malaise spreading across Europe is Hurco's utility in precision industries like aerospace and energy. Industrial demand appears to be softening in markets like Germany and Eastern Europe, but companies like Lincoln Electric (LECO), Colfax (CFX), and Atlas Copco have all talked about relative strength in areas like energy and mining.
Now, Hurco correlates better with overall German machine tool orders and manufacturing activity than it does with Lincoln Electric or Colfax, but being overweight to end-user demand in aerospace and energy may yet help the company.
The Bottom Line
The good news as it pertains to Hurco's stock is that low single-digit free cash flow growth assumptions are enough to support a price target well into the $30s, and meeting or beating prior peaks in sales and margins could push that target into the $40s.
There is no question that Hurco is a tiny company with a thin float, as the company has less than 7 million shares outstanding. It can, in fact, be argued that Hurco makes more sense as a private company than a public company. That said, value is value and if investors can stomach the added volatility that goes with minimal institutional support, Hurco could yet be a solid growth idea for investors to consider.