Hurco: Valuation Low Compared to Growth Prospects

| About: Hurco Companies, (HURC)

Last week, Hurco (NASDAQ:HURC) reported strong results for the first quarter of 2007. Revenue came in at $46.9 million, a 46% increase from the first quarter of 2006. Net income totaled $5.4 million, up 78% from the $3 million profit in the year ago period. Gross margin increased to 37% compared to 34% in the year ago period.

Historically Hurco’s first quarter has been seasonally weak and often the first quarter results have come in below those of the previous fourth quarter results. Not so this time as first quarter revenue increased about 9% compared to the fourth quarter of 2006 and profits were about 15% higher than in the fourth quarter.

Hurco cited “a significant improvement in demand” as the primary reason for the revenue and profit increases. They went on to say that European demand was especially strong, but unit orders in North America and Asia declined. However, the company stated that unit orders in Asia declined “due to when the orders were placed”. Although we do not expect a big improvement in North American demand, this comment about Asian demand implies that some orders may have been delayed until the second quarter.

As mentioned in our previous Hurco article, after completing the Ningbo facility expansion, Hurco plans to “build machines that are specifically designed for the complexities of the Chinese market”. Therefore, we believe that demand and unit orders should increase in Chinese markets relatively soon.

In addition to expected growth in Chinese markets, Hurco is now expecting growth in India as well. CEO Michael Doar recently stated:

“I am also pleased with the positive response to our participation in the Indian Machine Tool Exhibition 2007 held in Bangalore, India. Our focus on making machine tools that are powerful, yet easy to use is a natural fit for the Indian market. The integrated control and software on the Hurco machine tools that simplifies programming and machining processes is especially appealing to shop owners in India who face high employee turnover and an unskilled to semi-skilled labor force.”

The combination of machines that are specifically tailored for Chinese markets and the new focus on Indian markets should drive significant Asian growth at Hurco. We view the CEOs latest comments about the Indian market as further validation of our Asian growth expectations.

Currently only one analyst actively covers Hurco. Due to the recent growth and the prospects for additional growth in Asian markets, we believe that additional analysts will start coverage on Hurco soon. Even after the recent rise in share price, Hurco’s current P/E stands at about 18 and a conservative forward P/E (without factoring in much Asian growth) is about 12. These are very reasonable ratios for a company with a proven track record and excellent growth prospects.

Although we typically do not put much credence in analyst ratings, academic research has shown that the impact of analyst initiation is greater than the impact of a recommendation by an analyst who already covers the stock. Initiation of coverage increases liquidity and creates higher levels of investor interest in the stock. Hurco is perfectly positioned to take advantage of an expected increase in analyst coverage.

Despite the 43% increase Hurco shares have experienced since our initial buy recommendation, Hurco’s valuation is still relatively low considering the growth prospects at Hurco. Therefore, we have raised our target price on Hurco from $50 to $80 and Hurco remains a core position in our long term portfolio.

HURC 1-yr chart

Full disclosure: Author is long Hurco.

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